November 14, 2012 / 8:36 PM / 5 years ago

TEXT - Fitch revises AT&T rating outlook to negative

Nov 14 - Fitch Ratings has affirmed the 'A' Issuer Default Ratings (IDRs)
and debt security ratings of AT&T Inc. (AT&T) (NYSE: T) and its
subsidiaries. The company's short-term IDR and commercial paper ratings 
have been affirmed at 'F1'. The Rating Outlook, which Fitch only applies to 
long-term debt securities, has been revised to Negative from Stable. A full 
rating list is shown below.

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 a 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 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 its 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 expectations).

Fitch believes increased capital spending will strengthen the company's 
competitive position and is a positive rating factor. Over the next three years,
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, the company 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 economic 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 under the authorization 
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 and operating results 
have enabled the company to maintain its net leverage metric around 1.5x even 
while repurchasing nearly $9 billion of common stock. Fitch expects free cash 
flow 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, 
necessitating some borrowing as repurchases will be above free cash flow 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 last 12 months 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 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, or 
operating longer-term with, leverage at a level more reflective of the rating. 

Fitch has affirmed the following ratings and revised the Rating Outlook to 
Negative from Stable for the long term ratings:

AT&T, Inc. 
--Long-term IDR at 'A';
--Senior unsecured debt at 'A';
--$5 billion revolving credit facility due December 2015 at 'A';
--$3 billion 364-day facility due December 2012 at 'A';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.

AT&T Corp.
--Long-term IDR at 'A';
--Senior unsecured at 'A'.

BellSouth Corp.
--Long-term IDR at 'A';
--Senior unsecured at 'A'.

BellSouth Capital Funding Corp.
--Senior unsecured at 'A'.

BellSouth Telecommunications, Inc.
--IDR at 'A';
--Senior unsecured at 'A'.

AT&T Mobility LLC (formerly Cingular Wireless, LLC)
--Long-term IDR at 'A';
--Senior unsecured at 'A'.

New Cingular Wireless Services, LLC (formerly AT&T Wireless Services, Inc.)
--Long-term IDR at 'A';
--Senior unsecured at 'A'.

Ameritech Capital Funding
--Long-term IDR at 'A';
--Senior unsecured at 'A'.

Indiana Bell Telephone Company
--Long-term IDR at 'A';
--Senior unsecured at 'A'.

Michigan Bell Telephone Company
--Long-term IDR at 'A';
--Senior unsecured at 'A'.

Pacific Bell Telephone Company
--Long-term IDR at 'A';
--Senior unsecured at 'A'.

Wisconsin Bell Telephone Company
--Long-term IDR at 'A';
--Senior unsecured at 'A'.

Southwestern Bell Telephone Company
--Long-term IDR at 'A';
--Senior unsecured at 'A'.

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