Nov 28 - Fitch Ratings has assigned an 'A' rating to AT&T Inc.'s
(AT&T) offering of EUR1 billion 1.875% senior unsecured notes due 2020.
Proceeds are expected to be used for general corporate purposes. The Rating
Outlook is Negative.
The current 'A' rating is supported by AT&T's financial flexibility, the
company's diversified revenue mix, its significant size and economies of scale
as the largest telecommunications operator in the U.S., and Fitch's expectation
that AT&T will benefit from continued growth in wireless operating cash flows.
The Negative Outlook reflects Fitch's expectation that AT&T's net leverage is
likely to move up to its recently disclosed 1.8x upper boundary for leverage,
which represents a notable increase from the 1.47x at the end of the third
quarter of 2012 on a last 12-month (LTM) basis. The increased leverage is
expected to arise from the combined effects of a moderate increase in wireless
and wireline capital spending and the continuation of the company's share
repurchase program as announced in early November 2012. Prospective leverage
expectations are subject to uncertainty caused by the rate of stock repurchases,
actual capital expenditure levels, possible acquisitions (such as longer-term
spectrum needs) and asset divestitures (of which there are none in Fitch's
Fitch believes increased capital spending will strengthen the company's
competitive position and is a positive rating factor. Over the next three years,
Fitch believes capital spending will increase about 10%-12% over prior baseline
levels to $22 billion annually and then revert to mid-teen historical levels.
The investment program will expand the population covered by AT&T's 4G LTE
network by approximately 20% to 300 million, and enable the company to provide
higher broadband speeds over its wireline network in more rural areas. By
comparison, the company's original capital spending guidance for 2012 was about
$20 billion, although the company reduced guidance to the low end of a $19
billion to $20 billion range in October 2012.
Over the 2013-2015 period, AT&T will spend approximately $8 billion to increase
its 4G LTE network coverage from 250 million to 300 million pops (persons of
population). This coverage is expected to be completed by the end of 2014. In
addition to increasing 4G LTE coverage, AT&T will be increasing capacity through
the addition of 10,000 new macro cell sites, 1,000 distributed antenna systems
and 40,000 small cells. Up to nearly 30MHz of new spectrum in the wireless
communications spectrum (WCS) band will be deployed nationwide, with service to
be commercial in 2015. Approximately $6 billion will be spent to upgrade the
broadband speeds available to 75% of the customer locations in the company's
wireline footprint. In the remaining 25% of the customer locations where it will
not be economical to upgrade the wireline network to faster broadband speeds,
the company will offer a 4G LTE solution. These customer locations are scattered
across 65% of the company's geography.
In early 2012, AT&T started repurchasing common stock under a December 2010
authorization (the company did not repurchase stock while the T-Mobile USA
transaction was under consideration in 2011). Through the first nine months of
2012, AT&T's strong free cash flow (FCF) and operating results have enabled the
company to maintain its net leverage metric at around 1.5x even while
repurchasing nearly $9 billion of common stock. Fitch expects FCF to decline
from the $8 billion to $9 billion expected in 2012 to $4 billion annually, on
average, over the next three years.
For 2012, Fitch expects AT&T's leverage to be flat with 2011, when gross
leverage was 1.56x as adjusted for non-recurring items and the actuarial losses
on its benefit plans. After 2012, AT&T's continuation of stock repurchases
requiring some borrowing as repurchases will be above FCF levels, will push
leverage up over time, with net leverage expected to peak near a 1.8x upper
boundary in 2014. Thereafter, leverage is expected to decline over time.
In Fitch's view, liquidity is strong and provided by the company's FCF;
additional financial flexibility is provided by availability on the company's
revolving credit facilities. At Sept. 30, 2012, total debt outstanding was
approximately $63.7 billion, a moderate decline from the $64.8 billion
outstanding at the end of 2011. Of the total, $3.4 billion consists of debt due
within one year, including debt that can be put to the company. At Sept. 30,
2012, cash amounted to $2.2 billion, and for the LTM ending Sept. 30, 2012, AT&T
produced $7 billion in FCF (net cash provided by operating activities less
capital expenditures and dividends).
At end of the third quarter of 2012, the company did not have any drawings on
its $5 billion revolving credit facility due 2015, nor on its $3 billion,
364-day facility due December 2012. The principal financial covenant for the
2015 facility requires debt to EBITDA, as defined in the agreement, to be no
more than 3x. The identical financial covenant is only applicable in the 364-day
facility if advances are converted into a term loan.
Relative to the company's expected free cash flows, upcoming debt maturities are
manageable. There are no material debt maturities remaining in 2012. In 2013,
debt maturities approximate $3.4 billion, including approximately $1.6 billion
in debt that may be put to the company. Maturities amount to $3.8 billion in
What Could Trigger A Rating Action
The Rating Outlook could be revised to Stable if:
--The company begins to manage net leverage down from Fitch's expected peak just
under 1.8x in 2014;
--Fitch believes leverage will not reach peak levels as a result of the outcome
of the following factors, including, but not limited to, stronger operating
results, lower capital spending, and the effect of any acquisitions or
divestitures that may occur.
A negative rating action could occur if:
--Net leverage remains above (or is expected to remain above) the 1.8x level for
several quarters, including expected leverage resulting from a material
--Fitch believes management has weakened its commitment to returning to, or
operating longer-term with, leverage at a level more reflective of the rating.