Investing.com -- Lumen Technologies Inc., a U.S.-based telecommunications service provider, has seen its credit rating upgraded to ’B-’ from ’CCC+’ by S&P Global (NYSE:SPGI) Ratings. This comes after Lumen secured indefeasible rights of use (IRU) contracts with hyperscalers and large technology companies, valued at about $8.5 billion. These contracts will provide network capacity to meet the increasing demand for data driven by Artificial Intelligence (AI).
The contracts are expected to provide Lumen with improved liquidity and financial flexibility, enabling it to execute on its turnaround strategy. This strategy involves the integration of various networks and IT systems. The upgrade also removes the company’s ratings from CreditWatch, where they were placed with positive implications on November 15, 2024.
The stable outlook is based on the expectation that these contracts will bolster Lumen’s near-term liquidity, helping it to cover cash flow deficits from its core business, pay down debt, and reduce leverage over the longer term. However, ongoing revenue declines over the next year are expected due to industry pressures and exposure to legacy products and services. This could result in leverage remaining elevated at around 5.5x-6x.
Following its $5 billion of contract wins with Microsoft (NASDAQ:MSFT) and other major hyperscalers to support AI data demand, Lumen announced a series of new transactions valued at more than $3.5 billion. These primarily consist of dark fiber sales with much of cash payments being front-end loaded, most likely within the first four years. Lumen expects to receive at least $3 billion in aggregate in 2025.
In 2024, Lumen generated about $1.1 billion of free operating cash flow (FOCF), a substantial improvement from negative FOCF of about $940 million in 2023. In 2025, Lumen’s liquidity sources include about $1.9 billion of cash and equivalents and $737 million of availability under its $956 million of revolving credit facilities.
Lumen still faces challenging business conditions and secular headwinds. In 2024, total North America enterprise revenue fell 5%, including a 7% decline in large enterprise revenue and an 8% decline in mid-market enterprise revenue.
The company’s EBITDA dropped 15% in 2024, and the mid-point of the company’s guidance implies another sharp double-digit earnings decline in 2025. This does not include about $300 million of one-time costs associated with its plan to integrate legacy networks IT systems as part of its $1 billion transformation plan.
Lumen is also exploring a potential sale of all or a portion of its mass markets business, which would make sense given the company’s limited fiber-to-the-home (FTTH) deployment relative to the size of its footprint and its strategy to go all in on the wave of AI fiber demand.
The company’s mass market segment only covers about 19% of its service area with fiber. The remainder consists of copper-based digital subscriber line (DSL) broadband service. However, the outcome of any asset sale is uncertain and could include all the mass markets business or just the fiber assets.
S&P Global Ratings could lower the rating on Lumen if it experiences execution missteps from the deployment of new fiber routes for the hyperscalers or the integration of legacy networks and IT systems. The rating could also be lowered if borrowing rates rise such that the company is unable to refinance at rates that generate positive cash flow.
On the other hand, S&P Global Ratings could raise the rating on Lumen if it yields reasonable returns on its new contracts and executes on its turnaround strategy. The rating could also be raised if the company enters into an agreement to sell all or some of its mass markets business such that leverage declines to below 5x.
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