October 20, 2017 / 1:59 PM / a year ago

Fitch Maintains AT&T's 'A-' L-T IDR on Rating Watch Negative

(The following statement was released by the rating agency) CHICAGO, October 20 (Fitch) Fitch Ratings has maintained on Rating Watch Negative the 'A-' long-term Issuer Default Ratings (IDRs) and senior unsecured debt of AT&T Inc. (AT&T) (NYSE: T) and its subsidiaries. Fitch has also affirmed the company's short-term IDR and commercial paper ratings at 'F2'. A full list of rating actions follows at the end of this release. The ratings are on Negative Watch due to the pending Time Warner Inc. acquisition, which was announced Oct. 24, 2016 and is pending regulatory approval. KEY RATING DRIVERS Acquisition of Time Warner: Fitch believes AT&T's acquisition of Time Warner provides AT&T with a strong foothold in the evolving communications and media landscape. The acquisition, combined with AT&T's 2015 acquisition of DIRECTV, offers the potential to capitalize on emerging trends for mobile video and over-the-top (OTT) video delivery. Other benefits include the diversification of AT&T's revenue stream and additional financial flexibility owing to Time Warner's strong free cash flow (FCF). The Negative Watch for AT&T reflects the increase in leverage for AT&T, pro forma for the transaction. AT&T currently operates with gross leverage at the upper end of Fitch's expectations for the current 'A-' rating. At the end of 2018, approximately one year after the expected close of the transaction, Fitch estimates AT&T's gross leverage will be 2.8x, and then decline by approximately 0.3x in 2019. As currently proposed, the transaction would potentially lead to a one-notch downgrade for AT&T to 'BBB+'/Stable Outlook. However, the final rating would depend on Fitch's further analysis of the transaction, an assessment of AT&T's post-acquisition financial policies, and the effect of any additional conditions placed on the transaction by the regulatory approval process. Deleveraging Expected: On the announcement of the Time Warner transaction, AT&T affirmed its commitment to delever to a net leverage target of 1.8x four years after the close of the transaction as FCF are used to reduce debt. In addition to the incremental FCF from Time Warner in 2018 and beyond, Fitch's base case for AT&T on a stand-alone basis incorporates moderate revenue and EBITDA growth, with additional benefits to EBITDA stemming from the remaining cost synergies from DirecTV and cost reduction initiatives. In addition, Fitch expects a slight reduction in capital intensity over time via AT&T's network initiatives, and the lower capital intensity of Time Warner's operations. Core Telecom Leverage: As of June 30, 2017, AT&T's gross core telecom leverage was 2.7x. Gross debt includes a portion of the cash financing for the Time Warner acquisition and as a result net core telecom leverage was 2.2x. 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. Unlimited Wireless Plan Effects: Competition has caused all the major operators to offer unlimited wireless data services, which in turn has tempered wireless service revenue growth as the ability to monetize growth in data usage has stalled. In the near term the impact on revenues is negative as heavy users or "optimizers" trade down into unlimited plans and the company loses overage revenues and revenues from those on large packages. Over time, lower usage customers may mitigate the effect as their usage growth drives them into higher usage plans or into unlimited plans. Fitch believes unlimited plans will lead to reduced profitability and increased investment in the industry. FirstNet: AT&T won a bid to build and manage a nationwide broadband network dedicated to first responders. Under the agreement, AT&T will receive 20 MHz of low band spectrum and $6.5 billion in success-based payments. AT&T expects to spend $40 billion over the 25-year life of the contract to build, deploy, operate and maintain the network. As of Oct. 17, 27 of 56 states and other entities have opted into the network. AT&T can use the network for commercial purposes, although first responders will have priority access to the network when needed. DERIVATION SUMMARY AT&T's 'A-' IDR reflects its large scale of operations, diversified revenue streams by customer and technology, and relatively strong operating profitability. Current leverage is moderately high for the rating. AT&T'S principal competitor is Verizon (VZ; A-/Stable), as they compete head to head in the wireless and business services segments, where they are currently the largest two operators. In wireless, AT&T faces competition from Sprint (S; B+/Stable) and T-Mobile, and a host of smaller regional carriers. In the enterprise business, in addition to Verizon, AT&T faces competition from a number of carriers, such as CenturyLink (CTL; BB+/Watch Negative) and Level 3 Communications (LVLT; BB/Stable). Once CenturyLink completes its acquisition of Level 3, it will become the second largest enterprise service provider by revenue. Cable has been a strong competitor in the residential and small business segments for voice and data services. Following the close of the Time Warner acquisition, AT&T's leverage is expected to be higher than its current 'A-' peers, Verizon and Comcast Corporation (CMCSA; A-/Stable). KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Fitch assumes the Time Warner transaction closes at yearend 2017. --Fitch estimates AT&T's revenue on a stand-alone basis grows less than 1%. EBITDA margins are forecast to be in the low 30% range during the forecast period. --Fitch has assumed there are no stock repurchases through the next several years given the company's near-term focus on debt reduction. --In 2017, Fitch expects consolidated capital spending to be in line with company guidance of approximately $22 billion. Fitch's assumptions reflect similar levels over the forecast horizon for AT&T, with incremental capital spending for Time Warner following the merger close. --Fitch's assumptions do not include potential spending on the FirstNet nationwide public safety broadband network and will be incorporated into its assumptions on the resolution of the Rating Watch. For Time Warner, Fitch's key assumptions within the agency's rating case include: --Fitch assumes that Turner cable networks businesses' revenues continue to grow by mid-single digits, driven by higher affiliate fees and stable advertising revenues. --HBO revenues grow in the mid-single digits driven in large part by an acceleration of subscription revenue growth. --The film and television studios grow by low- to mid-single digits during the forecasted periods. This segment benefits from continued demand for television content, international expansion, and digital delivery, offset by ongoing declines in DVDs. --Stable operating margins due to positive operating leverage of its businesses and higher margin profile of digital versus physical delivery are offset somewhat by higher overall investment in programming and production. --Increased programming and production investment in the businesses. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --Should the acquisition of Time Warner be terminated, Fitch would potentially affirm AT&T's ratings with a Stable Outlook under the agency's base case. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --At the 'BBB+' level, a further downgrade would result if AT&T adopted a more aggressive financial strategy or event-driven merger and acquisition activity that drives leverage beyond Fitch's 3.5x threshold in the absence of a creditable de-leveraging plan. Negative rating actions could also result if Fitch observes weakening of AT&T's competitive position in its multiple lines of business. LIQUIDITY Strong Liquidity Profile: At June 30, 2017, the company did not have any drawings on its revolving credit facility (RCF). AT&T has a five-year $12 billion RCF in place through December 2020. The principal financial covenant for the RCF requires net debt-to-consolidated EBITDA, as defined, to be no more than 3.5x. At June 30, 2017, the company's reported cash and cash equivalents totalled $25.6 billion (approximately $866 million of this amount resided in foreign jurisdictions). Subsequent to the end of the second quarter of 2017, AT&T issued $22.5 billion in debt in order to close the Time Warner transaction. The company also has a $10 billion term loan that may be used to raise cash proceeds needed to close the transaction, to refinance Time Warner debt and for the repayment of related expenses. FULL LIST OF RATING ACTIONS Fitch affirms the following ratings: AT&T, Inc. --Short-term IDR at 'F2'; --Commercial paper at 'F2'. Fitch maintains the following ratings on Rating Watch Negative: AT&T, Inc. --Long-term IDR 'A-'; --Senior unsecured debt 'A-'; --$12 billion revolving credit facility due December 2020 'A-'. AT&T Corp. --Long-term IDR 'A-'; --Senior unsecured 'A-'. DIRECTV Holdings LLC (DTVH) --Long-term IDR 'A-'; --Senior unsecured notes 'A-'. BellSouth Corp. --Long-term IDR 'A-'; --Senior unsecured 'A-'. BellSouth Capital Funding Corp. --Senior unsecured 'A-'. BellSouth Telecommunications, Inc. --Long-term IDR 'A-'; --Senior unsecured 'A-'. AT&T Mobility LLC (formerly Cingular Wireless, LLC) --Long-term IDR 'A-'; --Senior unsecured 'A-'. New Cingular Wireless Services, LLC (formerly AT&T Wireless Services, Inc.) --Long-term IDR 'A-'; --Senior unsecured 'A-'. Ameritech Capital Funding --Long-term IDR 'A-'; --Senior unsecured 'A-'. Indiana Bell Telephone Company --Long-term IDR 'A-'; --Senior unsecured 'A-'. Michigan Bell Telephone Company --Long-term IDR 'A-'; --Senior unsecured 'A-'. Pacific Bell Telephone Company --Long-term IDR 'A-'; --Senior unsecured to 'A-'. Wisconsin Bell Telephone Company --Long-term IDR 'A-'; --Senior unsecured 'A-'. The following ratings are withdrawn: AT&T, Inc. (debt repayment) --$2.286 billion Tranche A term loan facility due March 2018 'A-'; --$1.869 billion Tranche B term loan facility due March 2020 'A-'. Southwestern Bell Telephone Company (no longer any debt outstanding) --Long-term IDR 'A-'. Contact: Primary Analyst John C. 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 David Peterson Senior Director +1-312-368-3177 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 $10.7 billion (year-end 2016). Fitch added back off-balance sheet securitization debt ($3.4 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 Corporate Rating Criteria (pub. 07 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here 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. 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below