|By Business Wire||
|June 3, 2014 04:28 PM EDT||
Fitch Ratings has assigned an 'A' rating to AT&T Inc.'s (AT&T) proposed offering of senior unsecured 30-year notes. Proceeds are expected to be used for general corporate purposes, including the repayment of maturing debt. AT&T's Issuer Default rating (IDR) is 'A'. The company's IDR and debt securities remain on Rating Watch Negative, where they were placed on May 19 upon the announcement of the acquisition of DIRECTV. DIRECTV's wholly-owned indirect subsidiary, DIRECTV Holdings LLC, has an IDR of 'BBB-'.
KEY RATING DRIVERS
Fitch believes AT&T's acquisition of DIRECTV will improve its financial flexibility owing to DIRECTV's strong free cash flows and the significant equity component in the transaction financing. The addition of DIRECTV will also strengthen AT&T's position in the evolving video landscape, offering the potential to capitalize on trends for mobile video and over-the-top (OTT) video delivery. Other benefits include the scale brought by DIRECTV's substantially larger video subscriber base and the diversification of AT&T's revenue stream.
DIRECTV's video assets are complementary to AT&T's operations, but the longer term strategic benefits are less clear and depend on the post-merger company's ability to capitalize on emerging trends in the industry.
The Negative Watch reflects the modest increase in leverage for AT&T, pro forma for the transaction. Currently, AT&T operates with leverage at the upper bounds for the current 'A' rating. As currently proposed the transaction would likely lead to a one-notch downgrade for AT&T to 'A-' and a Stable Outlook. On a pro forma basis, Fitch estimates leverage in 2015 will be less than 2.0x. However, the final rating would depend on any additional conditions placed on the transaction by the regulatory approval process, an updated view of AT&T's anticipated spectrum spending, and an assessment of AT&T's post-acquisition financial policies.
For the latest 12 months (LTM) ended March 31, 2014, AT&T's net leverage as calculated by Fitch was 1.8x, an increase from the 1.6x at year-end 2012. AT&T has maintained relatively aggressive stock repurchases over a period when free cash flow (FCF) has been lower due to temporary, growth-focused capital spending, leading to additional borrowing. Modestly growing EBITDA is softening the effect of the rise in debt on leverage.
In Fitch's view, AT&T's liquidity is strong and supported by the company's cash, FCF and availability on its revolving credit facilities (RCFs). At March 31, 2014, cash amounted to $3.6 billion and for the most recent LTM, AT&T produced $3.1 billion in FCF (net cash provided by operating activities less capital expenditures and dividends), an amount short of the $8.4 billion in stock repurchases over the course of the same period. Fitch expects 2014 FCF to be similar to the trend through the LTM ending March 31, 2014.
At March 31, 2014, the company did not have any drawings on either its $5 billion RCF due 2018 or its $3 billion RCF due 2017. The principal financial covenant for both facilities requires debt-to-EBITDA, as defined, to be no more than 3x.
At March 31, 2014, total debt outstanding was approximately $79.9 billion. Relative to the company's expected FCFs, upcoming debt maturities are manageable. For the remainder of 2014, debt maturities are approximately $4 billion, and in 2015, $8.2 billion. Maturities in 2015 include debt putable to the company.
Negative: The transaction as it currently stands will likely lead to a one-notch downgrade of AT&T's rating to 'A-'.
Positive: The rating could be affirmed at 'A' if the company's financial policies targeted leverage of 1.6x to 1.7x by 2016.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Rating Telecom Companies
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
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