CHICAGO--(BUSINESS WIRE)--Fitch Ratings has placed the following AT&T, Inc. (AT&T) ratings on Rating Watch Negative:
--Long-Term Issuer Default Rating (IDR) 'A';
--Senior unsecured debt 'A';
--$5 billion four-year revolving credit facility 'A';
--$3 billion 364-day revolving credit facility 'A';
--Short-Term IDR 'F1';
--Commercial paper 'F1'.
Fitch has also placed its ratings for AT&T's subsidiaries on Rating Watch Negative. A full list of rating actions follows at the end of this release.
The actions reflect AT&T's and Deutsche Telekom's (DT) announcement of a definitive agreement whereby AT&T will acquire T-Mobile USA from DT in a cash and stock transaction valued at $39 billion. The cash portion of the transaction is $25 billion and will be financed with debt and cash on AT&T's balance sheet. The remaining consideration will consist of AT&T common equity.
The rating action reflects Fitch's need to assess the effect of the transaction on AT&T's credit profile and capital structure, financing for the cash portion of the transaction, the proposed synergies anticipated, integration costs and the company's future financial performance and prospective credit metrics. Fitch will also assess the potentially challenging regulatory hurdles to the transaction, which combine the second- and fourth-largest wireless carriers in the U.S. Regulatory review of the transaction may require divestitures of overlapping wireless assets, and in order to obtain approval for the transaction, AT&T has offered accelerated capital spending on high-speed wireless data services.
Fitch believes, pending final review of the transaction, that a downgrade, if necessary, would be limited to one notch. To maintain the current rating, Fitch would like to see a path for AT&T's debt to EBITDA metric to be solidly within a 1.5 times (x) to 1.7x gross debt to EBITDA range appropriate for this rating category.
On a pro forma basis, AT&T's 2010 leverage would have been 2.1x after considering $25 billion in additional debt and T-Mobile USA's $5.5 billion of EBITDA in 2010, as well as the nearly $2 billion purchase of wireless spectrum from Qualcomm Inc. Leverage could be modestly higher or lower depending on the ultimate cash portion and the potential effects of divestitures. At year-end 2010, AT&T's gross leverage was 1.7x on a stand-alone basis. AT&T will not assume any debt in the T-Mobile USA transaction.
To finance the cash portion of the transaction, AT&T has obtained a one-year unsecured bridge financing commitment for $20 billion from J.P. Morgan, although Fitch expects the company to enter the long-term debt markets for a portion of the transaction. With regard to the equity portion of the transaction, DT will have an 8% ownership interest in AT&T and a DT representative will join AT&T's board of directors. AT&T may raise the cash portion of the transaction by up to $4.2 billion with an offsetting reduction in the equity consideration, but in no case would DT's ownership stake be less than 5%.
AT&T indicates that the transaction will result in $3 billion of annual revenue and cost synergies three years following the close of the transaction. Fitch believes cost synergies, as well as avoided capital and spectrum expenditures, are highly likely to result from the transaction, and should be aided by the common, GSM-based technology platform. Revenue synergies, which the company believes will arise from increased smartphone penetration and increased data revenue per user, may arise, although Fitch's analysis will discount such synergies.
On a current basis, liquidity is provided by cash and FCF, and additional financial flexibility is provided by availability on the company's revolving credit facilities. At Dec. 31, 2010, total debt outstanding was approximately $66.2 billion, a decline from approximately $72.1 billion at the end of 2009. Of the total, $5.5 billion consists of long-term debt maturing within one year, including approximately $1 billion of debt that can be put to the company, and nearly $1.7 billion of commercial paper and bank borrowings. At Dec. 31, 2010, cash amounted to $1.4 billion, and in 2010 AT&T produced $4.8 billion in FCF (net cash provided by operating activities less capital expenditures and dividends). The company did not have any drawings on its revolving credit facility. In December 2010, AT&T entered into a new $5 billion four-year senior unsecured revolving credit facility and a $3 billion 364-day revolving credit facility. The facilities replaced a $9.465 billion facility that was to mature in July 2011. The principal financial covenant, which is only in the four-year agreement, requires debt to EBITDA, as defined in the agreement, to be no more than 3x.
For 2011, the company indicates FCF will grow from the $5 billion achieved in 2010, with lower capital spending contributing to growth. Per the company's guidance, capital spending is expected to be in the low to mid $19 billion range, moderately less than the $20.3 billion spent in 2010. A major contributor to the decline in capital spending is the fact that AT&T will no longer capitalize interest on wireless spectrum that it will use to provide LTE service since the spectrum is being placed into service. Fitch believes reinforcing its strong competitive position in the wireless business and wireless fiber backhaul related spending will remain priorities of AT&T's 2011 capital spending.
Fitch has placed the following ratings on Rating Watch Negative:
AT&T, Inc.
--Long-Term Issuer Default Rating (IDR) 'A';
--Senior unsecured debt 'A';
--$5 billion four-year revolving credit facility 'A';
--$3 billion 364-day revolving credit facility 'A';
--Short-Term IDR 'F1';
--Commercial paper 'F1'.
AT&T Corp.
--Long-term IDR 'A';
--Senior unsecured 'A'.
BellSouth Corp.
--Long-term IDR 'A';
--Senior unsecured 'A'.
BellSouth Capital Funding Corp.
--Senior unsecured 'A'.
BellSouth Telecommunications, Inc.
--IDR 'A';
--Senior unsecured 'A'.
AT&T Mobility LLC (formerly Cingular Wireless, LLC)
--Long-term IDR 'A';
--Senior unsecured 'A'.
New Cingular Wireless Services, LLC (formerly AT&T Wireless Services, Inc.)
--Long-term IDR 'A';
--Senior unsecured 'A'.
Ameritech Capital Funding
--Long-term IDR 'A';
--Senior unsecured 'A'.
Indiana Bell Telephone Company
--Long-term IDR 'A';
--Senior unsecured 'A'.
Michigan Bell Telephone Company
--Long-term IDR 'A';
--Senior unsecured 'A'.
Pacific Bell Telephone Company
--Long-term IDR 'A';
--Senior unsecured 'A'.
Wisconsin Bell Telephone Company
--Long-term IDR 'A';
--Senior unsecured 'A'.
Southwestern Bell Telephone Company
--Long-term IDR 'A';
--Senior unsecured 'A'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Global Telecoms Companies' (Sept. 16, 2010);
--'Corporate Rating Methodology' (Aug. 16, 2010).
Applicable Criteria and Related Research:
Rating Global Telecoms Companies - Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
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