CenturyLink Dials Down Refinancing
October 4, 2012
Just as companies expect to quickly price high yield bonds to take advantage of low rates and refinance debt, so can they quickly call off these deals if conditions aren’t exactly what they want.
Citing “current market conditions,” telecommunications company CenturyLink pulled a $1 billion bond offer Monday and called off the tender offer it was meant to finance, despite price talk being close to what it paid on its most recent bond offering and in line with the current market norm.
The Monroe, La.-based company had offered a total of $1 billion in senior notes due 2022 and senior notes due 2042. The bonds were expected to price Oct. 1 in a drive-by via bookrunners JPMorgan, RBC, Barclays, Citigroup and Morgan Stanley. CenturyLink pulled the deal that same day, issuing a press release saying it decided not to proceeds with the offer “in light of current market conditions,” and that it had “opportunistically sought to refinance” subsidiary debt.
The company had planned to use the proceeds to finance a tender offer for its Qwest subsidiary’s $800 million in 7.125% senior notes due 2018. It called off the tender offer as a result of its pulled bond deal. CenturyLink said that it will go ahead and redeem all $550 million of its 8% senior notes due 2015 using revolver debt and that it could revive the tender offer for the 2018 notes at a later date.
As of June 30, CenturyLink had a $2 billion revolving line of credit, of which $1.75 billion was undrawn, according to Fitch Ratings.
Moody’s Investors Service, in a report issued after the bond offer was pulled, noted that “the unexpected usage of CenturyLink’s credit facility, which totals $2 billion, weakens the company’s liquidity profile and diminishes financial flexibility.” Moody’s said that the withdrawal of the bond offering did not affect the company’s ratings, and that it expects the borrowings under the revolver will peak at $1 billion and will be steadily reduced as CenturyLink will generate approximately $1.2 billion in free cash flow per year.
The ratings agency holds a negative credit outlook on the company, which it said, “reflects its limited financial flexibility after completing several sizable acquisitions in relatively short order.”
It had launched the tender offer for the 2018 notes at a price of $1.069.47 per $1,000 tendered. The tender offer had an abbreviated expiration date of Oct. 9, a time frame most tender offers use for an early tender period. JPMorgan and RBC were the dealer managers for the tender offer.
Price talk on the tranches of the bonds had reached 337 bps over Treasurys or 5.01% for the senior notes due 2022 and 450 bps over Treasurys or 7.31% for the senior notes due 2042, assuming the bonds were based on the respective 10-year and 30-year Treasury note yields, according to CreditSights. This pricing was on par with CenturyLink’s previous bond offering in March, when it issued $1.4 billion in 5.8% senior notes due 2022 and $650 million in 7.65% in senior notes due 2042.
The high yield primary market has been very receptive to new issues and has offered relatively low coupons to higher-rated offerings. Even recently priced issues with single-B ratings, such as Tenet Healthcare’s secured tranche of bonds priced with a coupon below 5%.
CreditSights analyst Anna Basanskaya pointed out that CenturyLink is a wireline carrier and provides no wireless services. Wireline is considered an industry in decline, as more and more users use wireless phones for their primary communication. CenturyLink has been moving to expand into providing data services, and has done that via acquisitions. Last year it acquired cloud infrastructure and IT services provider Savvis for $2.5 billion. It acquired broadband service provider Qwest in 2010 in a stock-for-stock transaction that valued Qwest at approximately $22.5 billion.
Basanskaya pointed out that approximately 13,000 CenturyLink workers who come over from Qwest voted to authorize a strike through their union if a new contact is not approved. The current contract was set to expire Oct. 6, two days after Leveraged Finance News headed to press.
The company is split-rated, holding an investment-grade Baa3 rating from Moody’s and a BB rating from Standard & Poor’s. Moody’s had rated the proposed bonds Baa3, and Fitch gave the proposed bonds an investment-grade BBB- rating. S&P rated the proposed bonds BB.