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Fitch Rates AT&T's Senior Unsecured Notes Offering 'A'; Remains on Negative Watch
[November 12, 2014]

Fitch Rates AT&T's Senior Unsecured Notes Offering 'A'; Remains on Negative Watch


CHICAGO --(Business Wire)--

Fitch Ratings has assigned an 'A' rating to AT&T (News - Alert) Inc.'s (AT&T) Swiss franc (CHF) offering of senior unsecured debt, consisting of CHF450 million due 2019, CHF450 million due 2024 and CHF150 million due 2030. The company's Issuer Default Rating (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-'.

Proceeds from this offering are expected to be used for general corporate purposes.

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 acquisition is expected to be completed in the first half of 2015, following the necessary regulatory approvals.

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.

Fitch's review of AT&T's rating will also incorporate AT&T's Nov. 7, 2014 announcement to acquire Mexican wireless operator Iusacell (News - Alert) for $2.5 billion, including Iusacell debt. Fitch believes the acquisition, on its own, has no material impact on AT&T's credit profile, but Fitch's review will incorporate AT&T's plans to invest in Mexico and build up this asset.

For the latest 12 months (LTM) ended Sept. 30, 2014, AT&T's net leverage as calculated by Fitch was 1.8x, an increase from the 1.7x at year-end 2013. EBITDA has been under some pressure due to wireless subscribers converting to no-device subsidy plans, which provide for discounted service on the company's data sharing plans. Other factors contributing to EBITDA pressure include rising content costs for its U-verse video services, and expenses related to the March 2014 Lep Wireless acquisition and the pending DIRECTV transaction.



In Fitch's view, AT&T's liquidity remains solid and supported by the company's cash and availability on its revolving credit facilities (RCFs). At Sept. 30, 2014, cash and cash equivalents amounted to $2.5 billion, and the company did not have any drawings on either its $5 billion RCF due 2018 or its $3 billion RCF due 2017. The company also has approximately $1.9 billion of highly liquid certificates of deposit and time deposits available to support liquidity needs. The principal financial covenant for both facilities requires debt-to-EBITDA, as defined, to be no more than 3x.

For 2014, Fitch expects free cash flow (FCF) to be modestly positive but less than the $3.9 billion generated in 2013; for the most recent LTM, AT&T incurred $1.1 billion in negative FCF (net cash provided by operating activities less capital expenditures and dividends). Capital spending over the LTM was $24.4 billion, about $3.4 billion over the $21 billion expected for 2014. FCF should turn positive for 2014 owing to a fourth quarter decline in capital spending.


Recently, AT&T completed wireless and wireline initiatives focused on its 4G LTE (News - Alert) and IP broadband networks, respectively, leading to a moderation of spending going forward. Following the completion of these initiatives, AT&T has indicated 2015 capital spending will approximate $18 billion, down $3 billion from anticipated spending in 2014.

At Sept. 30, 2014, total debt outstanding was approximately $75.6 billion. Relative to the company's cash, RCF availability and modest expected FCF, Fitch believes upcoming debt maturities are manageable. For the remainder of 2014, maturities are nominal. Debt maturities are approximately $6.5 billion in 2015. Maturities in 2015 include approximately $1.7 billion of debt putable to the company on an annual basis that Fitch believes is unlikely to be put.

RATING SENSITIVITIES

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:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Rating Telecom Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=921795

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