Fitch Rates Verizon Communications' Proposed Debt Issue 'A'; Outlook Stable
CHICAGO -- March 4, 2013
Fitch Ratings has assigned an 'A' rating to Verizon Communications, Inc.'s
(Verizon) (NYSE: VZ) proposed offering of $500 million of senior unsecured
floating rate notes under Rule 144A. The proceeds will be used to reduce
commercial paper. The Rating Outlook is Stable.
KEY RATING DRIVERS
--VZ's ratings are supported by strong free cash flows (FCF) which, in turn,
provide the company flexibility with respect to operating within its target
leverage range of 1.3 times (x)-1.4x. This leverage range is conservative
relative to Fitch's expectations of around 1.5x for the category.
--VZ has significant scale and scope in its domestic wireline and wireless
businesses and a high proportion of revenues from wireless and wireline growth
--An important component of VZ's ratings is the expectation for continued
relatively strong growth in Verizon Wireless' (VZW) revenue, EBITDA, and FCF.
In 2012, the domestic wireless segment produced approximately 65% of total
--Concerns include the ongoing competitive pressures in the residential
wireline market from wireless substitution and cable telephony competition,
and the effect of the slow economic recovery on revenues from business and
VZ's gross leverage for 2012 was approximately 1.4x. Consolidated cash
balances declined from $13.4 billion at the end of 2011 to $3.1 billion at
Dec. 31, 2012. The cash balances were relatively high at the end of 2011 in
anticipation of VZW's payment of a $10 billion distribution in January 2012.
An additional distribution of $8.5 billion was paid by VZW in the fourth
quarter of 2012. In the aggregate, approximately $8.3 billion of VZW's
dividends were paid to VZW's 45% owner, Vodafone Group Plc, with the remainder
retained by VZ. The distributions reflect VZW's strong FCF generation. In
2012, VZW's simple FCF (EBITDA less capital spending) was approximately $20.9
There is event risk regarding VZ's potential acquisition of Vodafone 45%
interest in VZW, as there would be concerns with regard to its initial outlay
and financing. At the current time, the companies continue to be strongly
committed to the partnership.
At Dec. 31, 2012, VZ had $52 billion in debt on a consolidated basis. Of this
amount, $3.9 billion was maturing long-term debt and $500 million was
commercial paper (CP). VZ's CP issuances are backed by a $6.2 billion credit
facility, and Fitch expects the company to maintain aggregate CP balances
within a level fully backed by the facility. The credit facility has no
ratings triggers or other restrictive covenants, such as leverage or interest
coverage tests. The three-year facility matures in August 2016. After the
effect of letters of credit (LOCs), approximately $6.1 billion is available on
the facility. On a consolidated basis, VZ and its subsidiaries have scheduled
debt maturities of approximately $3.9 billion and $6.8 billion in 2013 and
In 2012, FCF after dividends and capital spending (but prior to the VZW
distributions to Vodafone) was approximately $10.1 billion. In 2013, Fitch
expects VZ's FCF (after capital spending and dividends but prior to any
distributions to Vodafone) to be in the $11 billion to $12 billion range, an
increase from the $10.1 billion generated in 2012. Fitch believes that as FCF
continues to grow, and in the absence of other investment alternatives, the
company will have the flexibility to repurchase stock within the context of
maintaining leverage within its 1.3x-1.4x target range.
In 2013, Fitch expects consolidated capital spending to approximate 2012
levels, when spending totaled approximately $16.2 billion. The company's
guidance has called for capital spending as a percent of revenues to decline
slightly in 2013 relative to 2012. VZ has not provided capital spending
guidance by business segment for 2013. In 2013, key areas of capital spending
will consist of the continued buildout of advanced networks, including the 4G
wireless network and FiOS, as well as core network spending on IP and data
A positive rating action could occur if:
--Fitch believes a positive rating action is unlikely, given the industry's
business and technological risks.
A negative rating action could occur if:
--The rating could be negatively affected by heightened wireless competition.
Fitch believes there is a relatively low probability that VZW's competitive
position will become weaker than the wireless industry as a whole.
Additional information is available at 'www.fitchratings.com'. 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).
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
John C. Culver, CFA, +1-312-368-3216
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Bill Densmore, +1-312-368-3125
Michael Weaver, +1-312-368-3156
Brian Bertsch, +1-212-908-0549
Press spacebar to pause and continue. Press esc to stop.