May 18, 2017 / 4:55 PM / in 8 months

Fitch Rates AT&T's Sr. Unsecured Note Offering 'A-'; Remains on Negative Watch

(The following statement was released by the rating agency) CHICAGO, May 18 (Fitch) Fitch Ratings has assigned an 'A-' rating to AT&T Inc.'s (AT&T; NYSE: T) CAD1.35 billion senior unsecured note offering. The offering was in two tranches, CAD600 million 2.85% senior unsecured notes due 2024 and CAD750 million 4.85% senior unsecured notes due 2047. AT&T's Long-Term Issuer Default Rating (IDR) is 'A-'. The company's IDR and debt securities remain on Rating Watch Negative, where they were placed in October 2016 upon the announcement of the acquisition of Time Warner Inc. Time Warner has a Long-Term IDR of 'BBB+'. Proceeds from the offering are expected to be used for general corporate purposes. 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 2.7x. As currently proposed, the transaction would potentially lead to a one-notch downgrade for AT&T to 'BBB+' with a 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. Broadcast TV Spectrum Auction: AT&T's winning bid totalled approximately $910 million, and the deposit made in 2016 was sufficient to cover its payment, and AT&T received a refund of approximately $1.4 billion in April 2017. KEY ASSUMPTIONS For AT&T, Fitch's key assumptions within the agency's rating case include: --Fitch estimates AT&T's revenue on a stand-alone basis grows in the low-single digits approximating Fitch's estimates for GDP growth. 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 Positive Rating Action: Should the acquisition of Time Warner be terminated, Fitch would likely affirm AT&T's ratings with a Stable Outlook under the agency's base case. Negative Rating Action: The Time Warner transaction, as proposed, is likely to lead to a one-notch downgrade of AT&T. A further downgrade from the 'BBB+' 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 should Fitch begin to observe a weakening of AT&T's competitive position in its multiple lines of business. LIQUIDITY Strong Liquidity Profile: At March 31, 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 March 31, 2017, the company's reported cash and cash equivalents totalled $14.9 billion (approximately $1.3 billion of this amount resided in foreign jurisdictions). Debt Maturities: Relative to the company's cash, RCF availability, and modest expected FCF, Fitch believes upcoming debt maturities are manageable. Long-term debt maturities in 2017 and 2018 are approximately $6.6 billion and $8.8 billion, respectively. 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 Michael Weaver Managing Director +1-312-368-3156 Date of Relevant Rating Committee: Oct. 24, 2016 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: --Securitized equipment installment receivables are not included in core telecom leverage and are included in off-balance sheet debt. 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