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Microsoft Cloud Authors: Jayaram Krishnaswamy, Elizabeth White, Andreas Grabner, Jim Kaskade, Pat Romanski

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Fitch Rates AT&T's Senior Unsecured Notes Offering 'A'; Outlook Negative

Fitch Ratings has assigned an 'A' rating to AT&T Inc.'s (AT&T) offering of $2.25 billion of senior unsecured notes due 2016. The offering consists of $1 billion 0.9% fixed rate notes and $1.25 billion of floating rate notes. Proceeds are expected to be used for general corporate purposes. AT&T's Issuer Default rating (IDR) is 'A', and the Rating Outlook is Negative.

Key Rating Drivers

The 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 following concern is embedded in the rating:

--The Negative Outlook reflects Fitch's expectation that AT&T's net leverage is likely to move up to a 1.8x upper boundary for leverage, which represents a notable increase from the 1.5x level over the past couple of years.

AT&T's 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 expectations).

In January 2013, AT&T announced two transactions to improve its wireless spectrum position. Subject to regulatory approval, AT&T will acquire certain rural wireless assets and spectrum from Atlantic Tele-Network, Inc. for $780 million in cash. Additionally, the company has a pending transaction to acquire certain B-block 700 MHz licenses from Verizon Wireless for $1.9 billion in cash and certain Advanced Wireless Services spectrum licenses in several markets. In Fitch's view, the proposed acquisitions are strategically sound as they are supportive of wireless growth. The transactions, if completed, are not currently expected to push the company's credit metrics above the 1.8x net leverage level.

For 2013, Fitch expects AT&T's gross leverage to approximate 1.7x, flat with 2012 (excluding the actuarial losses on its benefit plans). Net leverage in 2012 was 1.58x. Over the next few years, AT&T's continuation of stock repurchases will require some borrowing as repurchases will be above FCF levels. Leverage will rise, 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 Dec. 31, 2012, total debt outstanding was approximately $69.8 billion, a $5 billion rise from the $64.8 billion outstanding at the end of 2011. Of the total amount outstanding, $3.5 billion consists of debt due within one year, including debt that can be put to the company. At Dec. 31, 2012, cash amounted to $4.9 billion, and for 2012, AT&T produced $9.2 billion in FCF (net cash provided by operating activities less capital expenditures and dividends), an amount short of the $12.8 billion in stock repurchases during the year. Fitch expects FCF to decline from $9.2 billion in 2012 to $4 billion annually, on average, over the next three years.

At end of 2012, the company did not have any drawings on its revolving credit facilities. The principal financial covenant for the 2016 and 2017 facilities requires debt to EBITDA, as defined, to be no more than 3x.

Relative to the company's expected free cash flows, upcoming debt maturities are manageable. 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 2014.

Rating Sensitivities

The Rating Outlook could be revised to Stable if:

--The company steadily manages 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 transaction;

--Fitch believes management has weakened its commitment to returning to, or operating longer-term with, leverage at a level more reflective of the rating.

Additional information is available at ''. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

Rating Telecom Companies


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