Moody's may cut Verizon debt ratings on Alltel deal
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, click on [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, and Alltel's senior unsecured debt 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 said it may also downgrade Verizon Communications' telephone units because their balance sheets could become strained as they face heavy investments and additional burden while Verizon Wireless 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 redcuction 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 the equity of Alltel 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 its rating.
"Moody's expects that Verizon Wireless will assume or guarantee Alltel's legacy debt."
(Reporting by Anastasija Johnson, Editing by Chizu Nomiyama)
