Fitch Affirms Level 3 Communications, Inc.'s IDR at 'B-'; Revises Outlook to Positive

Fitch's rating action recognizes the progress LVLT has made with integrating past acquisitions and addressing service provisioning issues that occurred during 2007, and reflects Fitch's expectation that LVLT's credit profile will strengthen over the ratings horizon. The acquisitions, completed during 2005 - 2007, increased the scale of the company's Core Network Service segment and provided a foundation for the company to transform its business from a provider of wholesale services to an integrated facilities based provider of telecommunications services to a broad range of customers. The acquisitions also expand LVLT's metropolitan facilities, which in Fitch's opinion strengthen the company's competitive position by increasing the scope of LVLT's product and service portfolio as well as positioning the company to drive more network traffic onto its own network resulting in rapid EBITDA growth and improving gross margins and EBITDA margins.

Importantly, the Positive Rating Outlook reflects Fitch's opinion that the company is positioned to capitalize on its broad product and service portfolio and relatively stable operating and competitive environment to drive revenue growth within its Core Network Services segment. Additionally, as the company leverages its existing network capabilities Fitch expects operating margins to increase and for the company to generate sustainable free cash flow.

Fitch expects that these factors will contribute to the continuing strengthening of LVLT's credit profile over the ratings horizon. Fitch believes that the incremental revenue and cash flows stemming from the past acquisitions will lead to a material improvement of LVLT's leverage. The improved cash flow coupled with reduced capital expenditures related to integration is expected to produce positive free cash flow for the remainder of 2008 and generate positive free cash flow during all of 2009. Management's leverage target is between 3.0 times (x) and 5.0x and the company believes that it will hit its target during 2009 marking a significant improvement from leverage of 7.27x for the latest 12 months (LTM) period ending June 30, 2008. Fitch expects leverage to approach 7.0x by the end of 2008 and be below 6.0x by the end of 2009.

Fitch believes that LVLT's provisioning capacity adequately matches market demand for its products and services. Revenue growth within Core Network Services will be predicated on LVLT's ability to increase provisioning capacity and elevate the productivity of a relatively inexperienced sales force. Revenue growth from the company's high margin Core Network Service segment is expected to drive further gross margin expansion.

Rating concerns center on the company's ability to deliver expected revenue growth within its Core Network Services segment and to have sufficient operating leverage with its cost structure to convert the revenue growth into higher cash flow. While the company does not have any significant maturities scheduled during the balance of 2008, the company does have approximately $1.4 billion of debt scheduled to mature during 2009 and 2010 elevating the refinancing risk within the company's credit profile. Fitch notes that LVLT has publically stated that it intends to retire $366 million of debt scheduled to mature during 2009 with existing cash on hand. Fitch expects that the company will refinance the $971 million of debt scheduled to mature during 2010, however, access to capital markets will depend in part on the company's operational performance and capital market conditions. LVLT does not maintain a revolver for liquidity purposes.

The timing of an upgrade of LVLT's IDR will be linked to the company's ability to consistently generate meaningful levels of free cash flow while maintaining positive organic revenue growth and improving margins, reduce leverage below 6.5x, and to articulate a plan that addresses 2010 scheduled maturities.

The absence of any material deterioration of LVLT's operating environment due to competitive or economic pressures will be a key consideration for an upgrade.

Fitch has affirmed the following ratings and revised the Rating Outlook to Positive.

LVLT:

--IDR 'B-';

--Senior unsecured notes 'CCC/RR5';

--Senior subordinated Notes 'CCC-/RR6'.

Level 3 Financing, Inc.:

--IDR 'B-';

--Senior secured term loan 'BB-/RR1';

--Senior unsecured notes 'B+/RR2'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

SOURCE: Fitch Ratings

Fitch Ratings David Peterson, +1-312-368-3177, Chicago Michael Weaver, +1-312-368-3156, Chicago Media Relations: CindyStoller, +1-212-908-0526, New York