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Fitch Affirms Verizon's IDR at 'A-'; Outlook Stable
June 1, 2017 / 7:50 PM / 4 months ago

Fitch Affirms Verizon's IDR at 'A-'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, June 01 (Fitch) Fitch Ratings has affirmed the 'A-' Long-Term Issuer Default Ratings (IDRs) and senior unsecured debt ratings for Verizon Communications Inc. (Verizon; NYSE: VZ) and its subsidiaries. Fitch has also affirmed Verizon's Short-Term IDR and commercial paper (CP) ratings at 'F2'. The Rating Outlook remains Stable. A full list of ratings actions follows at the end of this release. KEY RATING DRIVERS Competitive Position: The ratings are supported by Verizon Wireless's (VZW) strong competitive position, as evidenced through industry-low churn rates, high margins and the extensive coverage of approximately 98% of the U.S. population with its 4G LTE network. These factors are balanced against the intensely competitive wireless environment as well as the moderately high leverage for the rating, which stems from the February 2014 acquisition of the remaining 45% stake in VZW. The traditional smartphone offering has matured, and Verizon has had to respond to smaller operators competitively, while emerging applications, where Verizon is strongly positioned, are in a nascent stage. Core Telecom Leverage: Including the effects of a discretionary pension contribution that accelerated near-term minimum contributions, the effects of the Yahoo and XO acquisitions, and the data center sale, Fitch expects Verizon's core telecom leverage to increase slightly to 2.4x in 2017, relative to year-end 2016 core telecom leverage of 2.3x. To determine core telecom leverage, Fitch has applied a 5:1 debt to equity ratio to the company's handset receivables, after adding back off balance sheet securitizations. Impact of Unlimited: On Feb. 12, Verizon responded competitively to the unlimited offers in the market by initiating their unlimited plan. In the near term, the move to unlimited's effect on revenues is negative as 'optimizers' opt down and the company loses revenues from customers on large data packages and those that incur overages. Revenue trends have improved since the introduction of unlimited, but the sustainability of these trends will need to be monitored over the course of 2017. Longer-term, there is potential for some improvement in revenue as customers on lower-sized data plans consume more data and eventually move up to an unlimited package (data traffic on Verizon's LTE network increased 57% year over year). Pending Yahoo! Acquisition: Verizon's acquisition of Yahoo! Inc.'s operating businesses is expected to close in the middle of 2017. In February 2017, the two parties amended their agreement following an investigation into two potentially separate incidents regarding certain security and data breaches impacting customer data. The amended agreement lowered the price by $350 million to approximately $4.48 billion (subject to closing adjustments) and amended the terms regarding post-close liabilities. Data Center Sale: Verizon completed the $3.6 billion sale of its U.S. and Latin American data center sites to Equinix, Inc. on May 1, 2017. Straight Path Communications: Verizon has agreed to acquire the company for $3.1 billion in an all-stock transaction. Straight Path holds millimeter wave licenses nationwide in the 39 GHz band and licences in major markets in the 28 GHz. The spectrum will be used to accelerate the deployment of 5G wireless services. KEY ASSUMPTIONS --Fitch assumes modest revenue and EBITDA growth for Verizon over the next few years as the effects of the transition to unsubsidized wireless service pricing and unlimited service plans wind down and as acquisitions contribute to growth. --Core debt is expected to increase modestly in 2017 but then remain relatively stable. --VZW will continue to generate strong free cash flow (FCF) on an operational basis. VZW's simple FCF (EBITDA less capital spending) for the LTM ending March 31, 2017 was approximately $27.4 billion. --Fitch expects Verizon's consolidated capital spending in 2017 to be within company guidance of $16.8 billion to $17.5 billion and within historical levels for 2018. Investment in the wireless network, including related investments in fiber, continues to be an area of emphasis due to the strong demand for 4G LTE capacity for rapidly growing data services. --The company is currently conducting 5G trails, which could lead to higher capital spending, but is dependent on the outcome of those trials and an assessment of the opportunities. RATING SENSITIVITIES Positive Rating Action: Fitch believes a positive rating action is unlikely in the foreseeable future, given current levels of leverage. Negative Rating Action: Fitch may take a negative rating action if operating performance causes deleveraging to take place at a materially slower-than-anticipated pace, either alone or in combination with material debt-financed acquisitions. Discretionary management moves that cause core telecom leverage to rise above 2.5x, such as another material acquisition or stock repurchases, could lead to a negative action in the absence of a strong commitment to deleveraging. LIQUIDITY Strong Liquidity Profile: Verizon's liquidity is supported by its reported consolidated cash balance, which was $4.3 billion at March 31, 2017, and by its undrawn revolving credit facility (RCF). The RCF has availability of $9 billion and matures in September 2020. Fitch expects Verizon to maintain aggregate CP balances within a level fully backed by the RCF. The credit facility has no ratings triggers or other restrictive financial covenants, such as leverage or interest coverage tests. Verizon's cash from operations in 2017 will be negatively affected by wireless handset financing under the equipment installment programs, as the public securitizations funding handset sales beginning in 3Q16 are recorded in cash from financing activities. Debt Maturities: On a consolidated basis, as of March 31, 2017, Verizon and its subsidiaries had expected debt maturities (excluding capital leases) of approximately $1.8 billion and $5.2 billion in 2017 and 2018, respectively. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Verizon Communications Inc. --Long-term IDR at 'A-'; --Senior unsecured debt at 'A-'; --Senior unsecured bank facility at 'A-'; --Short-term IDR at 'F2'; --Commercial paper at 'F2'. Alltel Corp. GTE Corp. Verizon Delaware Verizon Maryland Verizon New England Verizon New Jersey Verizon New York Verizon Pennsylvania Verizon Virginia --IDR at 'A-'; --Senior unsecured at 'A-'. Cellco Partnership --IDR at 'A-'. Fitch has also assigned the following ratings: Verizon Communications Inc. --Senior unsecured $500 million InterNotes 'A-'; --Senior unsecured Swiss Franc notes 'A-'. Fitch has withdrawn the following rating due to its repayment: Verizon Communications Inc. --Senior unsecured term loan due 2019 'A-'. The Rating Outlook is Stable. Contact: Primary Analyst John Culver, CFA Senior Director +1-312-368-3216 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Bill Densmore Senior Director +1-312-368-3125 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Adjustments for outstanding equipment installment plan receivables related to financial services operations (assessed using a debt-to-equity ratio of 5x) resulted in a reduction of the level of debt used in calculating our leverage metrics by approximately $13.4 billion (yearend 2016). Fitch added back off-balance sheet securitization debt ($3 billion) before determining the reduction. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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