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Fitch Rates Verizon Communications' Proposed Debt Offering 'A+'; Outlook Stable

Posted on: Tuesday, 1 April 2008, 15:00 CDT

Fitch Ratings has assigned an 'A+' rating to Verizon Communications, Inc.'s (Verizon) (NYSE:VZ) proposed offering of senior unsecured notes. The notes will be sold in 5-, 10-, and 30-year tranches. Proceeds from the offering are expected to be used, in combination with cash on hand and the issuance of commercial paper, to fund the acquisition of wireless spectrum licenses by Verizon Wireless (VZW) in the recently completed spectrum auction conducted by the Federal Communications Commission's (FCC). The Rating Outlook is Stable.

The ratings incorporate Fitch's belief that Verizon is committed to maintaining leverage at 1.4 times (x) or slightly lower; at the end of 2007, Verizon's debt-to-EBITDA was approximately 1.04x. Fitch believes the company has adequate financial flexibility to manage at or under its target even considering the need to finance the approximately $9.4 billion in winning bids by VZW in the FCC's recently concluded auctions for licenses in the 700MHz spectrum.

Verizon's ratings also reflect the significant scale and scope in its domestic wireline and wireless businesses, the high proportion of revenues from wireline and wireless growth areas, prospects for continued earnings growth, and a conservative financial profile. A key supporting factor has been VZW's ability to maintain a strong competitive position among the four national operators. In addition, Verizon's wireline enterprise business has generated sequential growth in revenues over the past three quarters, and year over year growth for the past five quarters, as revenue growth from newer products has more than offset declines in legacy voice and data products. The principal concern remains the effect of competition in the residential wireline market.

An important consideration in Verizon's 'A+' Issuer Default Rating (IDR) and the Stable Rating Outlook is the continued strong growth at VZW of revenue, EBITDA and free cash flow. In 2007, VZW produced 47% and 57% of Verizon's consolidated revenues and EBITDA, respectively. VZW's revenues and EBITDA continue to grow above the industry average as it continues to take an above average proportion of retail postpaid subscribers added by the nationwide operators with the gains attributable to its strong brand, network quality and extensive distribution network. Although there is pressure on voice service revenues per customer, wireless data revenue growth has been more than offsetting the declines. Fitch believes growth prospects for data service revenues are good as lower price points are implemented, data-capable handsets are more widely deployed, and as new applications become available. More broadly, owing to its cash generation capability, Fitch expects VZW to sustain its market position through the acquisition of additional spectrum in the recent auction, its investment in network capacity, its network coverage and the expansion of its broadband wireless capabilities.

Continued competition for voice services in the consumer wireline market is a concern. Competitive effects on Verizon are moderated by the 16% of consolidated revenues in 2007 represented by consumer retail revenues (which exclude the former MCI mass market revenues). Fitch notes that the revenue outlook for the in-region consumer business has improved due to the expansion of the fiber-to-the-premises (FTTP) network and the increasing penetration of broadband and video services over the network.

Verizon has reduced debt levels over the past several years. At Dec. 31, 2007, Verizon had $31.2 billion in debt outstanding, versus $36.4 billion at the end of 2006. The main contributors to the reduction in debt in 2007 were improved net cash provided by continuing operations and asset sales earlier in the year. At the end of 2007, Verizon had approximately $3.0 billion in commercial paper (CP) and long-term debt maturing within one year. Fitch expects Verizon to maintain aggregate CP balances within a level fully backed by a $6 billion credit facility, which expires in September 2009. The credit facility has no ratings triggers or other restrictive covenants, such as leverage or interest coverage tests. For 2007, free cash flow after dividends and capital spending was approximately $3.4 billion, and at Dec. 31, 2007, Verizon had approximately $1.2 billion in cash.

Verizon's capital spending in 2008 is expected to be below the $17.5 billion spent in 2007. Verizon repurchased $2.8 billion in common stock in 2007 on a gross basis, and $1.6 billion on a net basis. Further stock repurchases are expected in 2008, although the company has not provided guidance as to the level of repurchases.

On March 31, 2008, Verizon completed the spin-off of its local exchange and related businesses in Maine, New Hampshire and Vermont to FairPoint Communications, Inc. As a result on the transaction, Verizon's external debt is expected to be reduced by approximately $1.4 billion as a result of the transaction, and the intercompany debt of Verizon New England Inc. is expected to be reduced by slightly more than $500 million.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

Source: Business Wire

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