DBRS Upgrades Level 3 Communications Ratings, Trends Now Stable

Dominion Bond Rating Service (DBRS) has today upgraded the ratings of Level 3 Communications Inc.’s Senior Unsecured Notes to B (low) from CCC and Subordinated Notes to CC from C and Level 3 Financing Inc.’s Senior Secured Credit Facility to B from B (low) and Senior Unsecured Notes to B(low) from CCC (collectively, Level 3 or the Company) with all trends now Stable. This concludes the Under Review with Positive Implications that Level 3’s ratings were placed under on October 17, 2006.

The upgrade is a result of the near-finished integration of WilTel Communications, LLC (WilTel) that has demonstrated meaningful cash flow improvement along with the improved outlook of Level 3 achieving a free cash flow positive business model in 2008. Despite the recent operational improvements, DBRS notes that Level 3 has not increased its 2007 EBITDA guidance, which is expected to be in a forecasted range between $830 million and $890 million including restructuring costs. Notwithstanding, DBRS believes that Level 3 will be able to substantially increase its EBITDA in 2008 as a result of integrating its acquisitions and capitalizing on network and operating integration efforts, which mainly involves moving more Broadwing Corporation (Broadwing) traffic onto Level 3’s higher-margin network.

DBRS reiterates that its major concern at this time is the considerable integration risk at Level 3, given that it has recently closed the larger acquisitions of Telcove, Inc., Looking Glass Networks, Inc., along with the expected acquisition of Broadwing. Therefore, Level 3 will face substantial integration challenges in 2007. In addition, DBRS acknowledges that Level 3’s debt levels still remain somewhat high at $6.6 billion as of September 30, 2006, and continue to restrict its ratings despite the expected improvements in cash flow from acquisitions. However, Level 3 has $1.2 billion in cash, which is sufficient to cover the cash component of the Broadwing purchase price ($744 million) and DBRS’s expectation of free cash flow deficits (approximately $300 million) over the next 12 months that includes integration costs ranging between $100 million and $120 million.

Finally, DBRS notes that Level 3 has little debt maturing between now and 2008 as a result of the Company’s recent debt refinancing efforts. In addition, Level 3 Financing Inc. has just announced a further $600 million debt issuance to help fund the cash portion of any past or pending acquisitions. Therefore, near-term liquidity is not a concern.

Positive rating action would likely occur if Level 3 achieves further improvement in credit metrics with EBITDA-to-interest coverage approaching two times, with cash flow-to-gross debt moving towards 0.1 times. In addition, this could be augmented by Level 3 negotiating to convert $1.3 billion of convertible debt that is currently above its strike price into equity in advance of the current conversion schedule of late 2008/early 2009 that would help offset the recent increases in debt to help fund acquisitions.

Notes:
All figures are in U.S. dollars unless otherwise noted.
These ratings are based on public information.