Fitch Rates AT&T's Senior Unsecured Notes Offering 'A'; Outlook Negative
CHICAGO -- November 14, 2013
Fitch Ratings has assigned an 'A' rating to AT&T Inc.'s (AT&T) offering of
CAD1 billion of senior unsecured 3.825% notes due 2020. Proceeds are expected
to be used for general corporate purposes, including the funding of the cash
consideration for a tender offer of certain debt issues. AT&T's Issuer Default
rating (IDR) is 'A', and the Rating Outlook is Negative.
KEY RATING DRIVERS
The 'A' rating assigned to AT&T is supported by its diversified revenue mix,
its significant size and economies of scale as the largest telecommunications
operator in the U.S., strong free cash flows (FCFs), 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 approximate 1.8x before declining after 2014. This level was
articulated by the company in November 2012 and is temporarily the upper
boundary of its targeted net leverage. The higher level represents a notable
increase from the 1.5x net leverage maintained by the company prior to its
temporary change in policy.
For the latest 12 months (LTM) ended Sept. 30, 2013, AT&T's net leverage as
calculated by Fitch was 1.8x, an increase from the 1.6x at year-end 2012
(excluding the actuarial losses on its benefit plans). Higher leverage arose
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. Following a peak in share
repurchases in the first quarter of 2013, repurchases have continued at a
For 2013, Fitch expects AT&T's year-end net leverage to approximate 1.7x to
1.8x. Leverage levels over the coming quarters may be modestly affected by the
timing of the sale of its wireless towers for approximately $4.85 billion
(expected to close in the fourth quarter of 2013) and the acquisition of Leap
Wireless International, Inc. for about $4 billion (expected to be completed in
the first quarter of 2014).
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, 2013, total debt outstanding was
approximately $76.2 billion, a $6.4 billion rise from the $69.8 billion
outstanding at the end of 2012. Of the total amount outstanding, $7.9 billion
consists of debt due within one year, including debt that can be put to the
company. At Sept. 30, 2013, cash amounted to $1.4 billion and for the LTM
ended Sept. 30, 2013, AT&T produced $5.9 billion in FCF (net cash provided by
operating activities less capital expenditures and dividends), an amount short
of the $15.5 billion in stock repurchases over the course of the same period.
Fitch expects FCF to range from $5 billion to $6 billion annually, on average,
over the next three years.
At Sept. 30, 2013, the company did not have any drawings on either its $5
billion revolving credit facility due 2016 or its $3 billion revolving credit
facility due 2017. 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 FCFs, upcoming debt maturities are
manageable. For the remainder of 2013, debt maturities are nominal. Maturities
amount to $5.4 billion in 2014 including debt putable to the company.
The Rating Outlook could be revised to Stable if:
--The company steadily manages net leverage down from Fitch's expected peak of
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 near or above (or is expected to remain near or above)
the 1.8x level for several quarters after its peak, 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 'A'
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).
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John C. Culver, CFA, +1-312-368-3216
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Bill Densmore, +1-312-368-3125
David Peterson, +1-312-368-3177
Brian Bertsch, +1-212-908-0549 (New York)
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