Fitch Rates Verizon Communications' Proposed Debt Issue 'A-'; Outlook Stable

Mon Mar 10, 2014 12:07pm EDT

(The following statement was released by the rating agency) CHICAGO, March 10 (Fitch) Fitch Ratings has assigned an 'A-' rating to Verizon Communications Inc.'s (NYSE: VZ) proposed senior unsecured debt offering. Fitch currently rates VZ's IDR 'A-' with a Stable Rating Outlook. Proceeds from the notes will be used to fund notes tendered in connection with concurrent, March 10, 2014 tender offers for up to $8.2 billion of outstanding higher-cost debt previously issued by VZ or certain of its subsidiaries. If proceeds exceed amounts needed to fund the notes tendered, the remaining proceeds will be used for general corporate purposes. KEY RATING DRIVERS --The February 2014 acquisition of the remaining Verizon Wireless (VZW) stake pressures VZ's near-term credit metrics, pushing pro forma leverage at closing to approximately 2.7x. With the close of the acquisition, Fitch expects VZ to materially reduce debt over the next few years. EBITDA growth, combined with debt reductions is expected to reduce leverage to approximately 2x by the end of 2016. Fitch believes this level is appropriate for an 'A-' rating. --While leverage will be outside an appropriate range for an 'A-' rating for several years, Fitch believes metrics will return to a level appropriate for the rating due to VZ's strong position in the wireless industry and the significant cash flows generated by the wireless business. This is in combination with Verizon management's commitment to delever, as evidenced by the aggressive delevering following the acquisition of Alltel Corporation in early 2009. Other supporting factors include the absence of operations-related execution risk. --A key to debt reduction over the next several years will be the continued generation of strong free cash flow (FCF) at VZW. VZW's simple FCF (EBITDA less capital spending) in 2013 was approximately $24.8 billion. VZ's consolidated FCF (after dividends and capital spending but before distributions to Vodafone) was $16.3 billion in 2013. Fitch estimates FCF will be at least 50% lower in 2014 as a result of transaction-related interest costs, higher dividend requirements due to the shares issued to Vodafone equity holders and higher cash taxes. --The strong competitive position of VZW as evidenced by industry-low churn rates, high margins and the most developed LTE network in the U.S. support expectations for VZ's cash flow stability and the longer rating horizon embodied in the rating. VZ's gross leverage at year-end 2013 was 2.2x, with total debt at $93.6 billion. Consolidated cash balances of $53.5 billion on Dec. 31, 2013 include proceeds from the $49 billion of debt issued in September 2013 to finance the transaction. As a result net leverage was only 1.0x. VZ's liquidity is supported by a $6.2 billion credit facility. Fitch expects VZ to maintain aggregate CP balances within a level fully backed by the facility. The credit facility has no ratings triggers or other restrictive covenants, such as leverage or interest coverage tests. In August 2013, the facility was extended for a year and now matures in August 2017. After the effect of letters of credit (LOCs), approximately $6.1 billion is available on the facility. To provide additional liquidity, a $2 billion, 364-day revolving credit facility became effective in February 2014. This facility has a 3.5x leverage covenant. On a consolidated basis, VZ and its subsidiaries have scheduled debt maturities of approximately $3.2 billion and $2.6 billion in 2014 and 2015, respectively. In 2014, Fitch expects consolidated capital spending to range from $16.5 billion to $17 billion, comparable to or slightly higher than the $16.6 billion spent in 2013. Investment in the wireless network continues to be an area of emphasis due to the strong demand for 4G LTE capacity for rapidly growing data services. RATING SENSITIVITIES Fitch believes a positive rating action is unlikely in the foreseeable future, given the leverage incurred in the Vodafone transaction. Conversely, Fitch may take negative rating action if: --Operating performance causes delevering to take place at a materially slower than anticipated pace; --A weakening of VZW's competitive position that would jeopardize the stability of cash flows. 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 Mark Oline Managing Director +1-312-368-2073 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Additional information is available at ''. 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