DBRS Confirms Level 3 Communications Inc. and Affiliate’s Ratings

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of Level 3 Communications Inc.’s (“Level 3” or the “Company”) Senior Unsecured Notes at CCC and its Subordinated Notes at C. In addition, DBRS has confirmed the ratings of Level 3 Financing Inc.’s Senior Secured Credit Facility at B (low) and its Senior Unsecured Notes at CCC. All trends remain Stable.

Level 3’s ratings remain confined at their current levels and continue to reflect the high degree of leverage that exists at the Company (US$6.7 billion), along with the expectation of continued free cash flow deficits given the challenging environment that faces alternate communication providers.

DBRS changed the trend on Level 3’s ratings to Stable from Negative back in December 2005 reflecting the acquisition of WilTel Communications, LLC (“WilTel”), which should help improve Level 3’s cash flow from operations along with the Company’s improved liquidity position through the recent debt exchange offer. This exchange reduced the amount of debt maturing in 2008 from approximately US$1.3 billion to just under US$600 million, thus alleviating DBRS’s concerns about these upcoming maturities.

Although DBRS notes that the Company’s recent issuance of US$700 million in new debt will increase interest expense, it does provide Level 3 with the flexibility to either call back further 2008 notes that can be redeemed in 2006 or pursue further acquisitions (such as the recently announced ICG Communications, Inc.) that could potentially help Level 3 accelerate the reduction in its free cash flow deficits. Given its current configuration, Level 3 is still challenged by pricing declines in certain product areas, although it appears that pricing pressures are starting to moderate.

Additionally, the Company is also facing a shift in its business mix into new growth areas related to Voice over Internet Protocol (VoIP) and Video over Broadband to alleviate the declines in its managed modem business and the elimination of DSL revenues. DBRS believes uncertainty remains over the timing of consumer adoption of these new growth services, a factor that Level 3 has no control over. As a result, it remains unclear on exactly when these new services will begin to meaningfully contribute to Level 3’s cash flow from operations. DBRS does acknowledge that both the recent WilTel and Progress Telecom, LLC (“Progress Telecom”) acquisitions should materially reduce free cash flow deficits, although the full benefits will likely not be realized until 2007.

Note:
p - This rating is based on public information.