UPDATE 1-Moody's may cut Verizon ratings on Alltel deal

(Updates with S&P, Fitch actions)

NEW YORK, June 6 (Reuters) - Moody's Investors Service on Friday said it may cut Verizon Communications' (VZ.N) debt ratings after its mobile phone unit announced plans to acquire Alltel Corp.

Verizon Wireless on Thursday said it would buy the rural mobile phone service provider for $28.1 billion, including debt, in a move that would vault it to first place in the U.S. market ahead of AT&T Inc (T.N). For details, see [ID:nL06410726].

The rating agency said it may lower Verizon's ratings because the deal would increase leverage at the mobile phone subsidiary and would require Verizon to invest $1.7 billion in the first two years to achieve approximately $9 billion in synergies expected from the transaction.

Verizon's unsecured debt is rated "A3," the seventh highest investment grade. Alltel's senior unsecured debt, which Moody's said could be upgraded, is rated "Caa1," seven steps below investment grade.

"The review for possible downgrade of Verizon Communications will focus on the impact that the significant increase in leverage at Verizon Wireless will have on future cash distributions from Verizon Wireless to Verizon Communications and the impact of the acquisition on Verizon's overall leverage ratios and cash flows," Moody's analyst Dennis Saputo said in a statement.

Moody's is the latest rating company to react to the deal.

On Thursday, Fitch Ratings also said it may cut its "A-plus" rating, the fifth highest level, on Verizon and upgrade Alltel.

Standard & Poor's affirmed Verizon's "A" rating, the sixth highest, but changed the outlook to negative. The outlook indicates the likely direction of the rating over the next two years.

Moody's said it may also downgrade Verizon Communications' telephone units because their balance sheets could become strained as they make heavy investments and an additional burden while Verizon Wireless's leverage increases.

"Specifically, we will assess the possibility that Verizon may seek to increase dividends from these subsidiaries in order to offset what we believe will be a reduction in the cash flows from Verizon Wireless to Verizon, given the likelihood that Verizon Wireless will incur significant external debt," the company said.

Moody's said it may also upgrade debt ratings of Alltel, depending on how Verizon Wireless treats its debt.

Under the deal, Verizon Wireless would acquire Alltel's equity for $5.9 billion and take on an estimated $22.2 billion in debt, mostly incurred when Alltel was taken private in November in a leveraged buyout by TPG Capital and Goldman Sachs Group's GS Capital Partners.

The rating agency said it was highly likely that Verizon would refinance the bulk of the debt associated with Alltel's buyout, but if any of that debt remains outstanding or not guaranteed it would notch up Alltel's rating.

"Moody's expects that Verizon Wireless will assume or guarantee Alltel's legacy debt," the agency said. (Reporting by Anastasija Johnson, Editing by Jonathan Oatis)