March 21 (Reuters) - Fitch Ratings has assigned a 'BBB-' rating to Qwest Corporation's (QC) proposed offering of 40-year senior unsecured notes. QC is an indirect wholly owned subsidiary of CenturyLink, Inc. (CenturyLink). Fitch's Issuer Default Rating (IDR) on CenturyLink is 'BBB-' and the Outlook for all ratings is Stable.

Proceeds from the offering, along with available cash or additional borrowings under CenturyLink's credit facilities, will be used to fund tender offers for an aggregate purchase price (including a premium but excluding accrued interest) of up to $500 million of QC notes due in 2015 and 2016. The tender offers will be for QC's 8.375% notes due 2016 and its 7.625% notes due 2015, of which there are $810.5 million and $400 million outstanding, respectively. Acceptance priority will be given first to the 2016 notes and second to the 2015 notes.

Fitch's ratings for QC and CenturyLink are based on the expectations that CenturyLink's consolidated revenue profile will demonstrate a very gradual improvement in its revenue profile over the next several years in combination with solid leverage for the rating category, strong free cash flows (FCFs) and strong liquidity.

Fitch expects CenturyLink's revenue to stabilize in 2013 - 2014. Revenues from high-speed data and certain advanced business services, including the managed hosting and cloud computing services offered by Savvis Inc. (Savvis), and a modest but growing level of revenues from facilities-based video, are expected to contribute to stability. There is some downside risk due to the slowly growing economy, which could be partly offset by revenue synergies from the Savvis acquisition.

CenturyLink's FCF is expected to be relatively strong in the near term. Low cash tax payments arising from bonus depreciation and the net operating losses of its subsidiary, Qwest Communications International Inc. (Qwest), contribute to FCF levels remaining strong while the company incurs acquisition-related integration costs.

Fitch expects CenturyLink's gross debt to EBITDA to be approximately 2.6 times (x) to 2.7x in 2012, slightly higher than the 2.5x previously expected, but on a path to decline as acquisition synergies are realized and debt is reduced. In Fitch's view, CenturyLink is on a path to meet its commitment made following the Qwest acquisition to reduce debt by $1.5 billion - $2.0 billion by the end of 2012. The reduction excludes the $2 billion incurred to acquire Savvis. Leverage in 2011, pro forma for Qwest and Savvis, was 2.78x (excluding integration and merger-related costs and share-based compensation expenses) slightly higher than the 2.65x previously expected by Fitch.

The support provided by strong FCF and moderately declining leverage is balanced against the decline of traditional voice revenues, primarily in the consumer sector, from wireless substitution and moderate levels of continuing cable telephony substitution. Fitch expects such declines to continue over time, although the effect will lessen in the long run, as their share in the total revenue base diminishes.

In Fitch's opinion, execution risk is present with the integration of Qwest and Savvis but manageable. The successful integration of Qwest will be key to realizing the approximately $575 million of operating cost synergies over the three- to five-year period envisioned by the transaction. Operational risk is mitigated by management's experience in rationalizing previous large mergers, such as Embarq, and the expectation that Savvis will operate as a separate business unit.

In Fitch's view, as a result of the pressures in the landline business, CenturyLink will need to sustain leverage at a level of 2.5x or below, and its revenue profile will have to remain on a path toward a return to growth to maintain the current rating level. Fitch will evaluate the progress of revenue in strategic growth areas in light of the potential drag on improvements due to the weak economy. Fitch believes CenturyLink will need to display a dividend payout of 55% or less to maintain financial flexibility, but will evaluate the payout in the context of spending on growth initiatives (e.g. fiber to the cell site and demand-driven data center expansion).

CenturyLink's total debt was $21.8 billion at Dec. 31, 2011, and cash and equivalents amounted to approximately $128 million. Financial flexibility is provided through a $1.7 billion revolving credit facility, which matures in January 2015. As of Dec. 31, 2011, $1.423 billion was available on the facility, and there were no letters of credit outstanding against the facility. CenturyLink has a $160 million uncommitted revolving letter of credit facility, which had $129 million in outstanding letters of credit.

The principal financial covenants in the $1.7 billion revolving credit facility limit CenturyLink's debt to EBITDA for the past four quarters to no more than 4.0x and EBITDA to interest plus preferred dividends (with the terms as defined in the agreement) to no less than 1.5x. QC has a maintenance covenant of 2.85x and an incurrence covenant of 2.35x. The facility is guaranteed by Embarq, Qwest Communications International Inc. and Qwest Services Corporation (QSC).

In 2012, Fitch expects CenturyLink's FCF to range from $1.3 to $1.4 billion. Expected FCF levels reflect capital spending within the company's guidance range of $2.7 billion to $2.9 billion, which includes $100 million of integration capital spending. Within the capital budget, areas of focus for investment include continued fiber-to-the-tower initiatives, the expansion of data center capacity at Savvis, the continued build-out of fiber-to-the-node and success-based spending on video.

Fitch believes CenturyLink has the financial flexibility to manage upcoming maturities due to its FCF and credit facilities. CenturyLink's debt and capital lease maturities in 2012 and 2013 are $480 million and $1.7 billion, respectively, with the 2013 amount prior to the effects of a not yet completed tender offer for certain Embarq Corporation debt maturing in 2013. QC's total maturing debt in 2012 and 2013 is $64 million and $805 million, respectively.

Going forward, Fitch expects CenturyLink and QC will be its only issuing entities. CenturyLink has a universal shelf registration available for the issuance of debt and equity securities, as well as a $1.5 billion authorized commercial paper program. The company effectively limits borrowing under the program to the amount available under the credit facility. There was no commercial paper outstanding as of Dec. 31, 2011.

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