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Fitch Rates AT&T's Proposed Debt Offering 'A'; Outlook Stable

Posted on: Monday, 3 December 2007, 15:00 CST

Fitch Ratings has assigned an 'A' rating to AT&T Inc.'s (AT&T) (NYSE:T) proposed offering of senior unsecured debt. The offering is expected to have five-year and 30-year tranches. Proceeds from the offering are expected to be used for general corporate purposes. The Rating Outlook is Stable.

AT&T Inc.'s (AT&T) ratings reflect its diversified revenue mix, its significant size and economies of scale as the largest wireline, wireless and enterprise services operator in the United States, as well as Fitch's expectation that AT&T will benefit from continued growth in wireless operating cash flows. AT&T's revenue mix is diversified among three key lines of business. In the first nine months of 2007, the wireless segment generated approximately 34% total segment revenues, the enterprise line of business produced nearly 16% of total segment revenues and the consumer segment, facing rising competition from cable operators and continued wireless substitution, approximated 18% of total segment revenues.

Revenues are also derived from in-region business (small and medium-sized business), wholesale services, national mass markets (which are declining rapidly), as well as the advertising and publishing businesses. The BellSouth Corp. (BellSouth) merger has provided increased scale, as Fitch expects AT&T to achieve material operating cost synergies over 2007 to 2009 as it integrates the two companies. The ratings also incorporate Fitch's expectations that AT&T has the financial flexibility to maintain leverage in a range appropriate for the current rating category. Fitch expects AT&T to maintain credit-protection metrics, in the form of debt-to-EBITDA, of 1.5 times (x) or lower over Fitch's rating horizon.

Issues to monitor regarding AT&T's ratings include competition in the consumer segment, the execution risk posed by the integration of BellSouth's operations into AT&T's business and the effect of AT&T's stock-repurchase activities on debt levels. To offset the effects of competition on cash flow, AT&T must continue to be successful in controlling costs, achieve merger-related synergies and successfully implement its wireline-based video strategy.

At the end of the third quarter of 2007, AT&T had $60.6 billion in debt outstanding and cash amounted to $2.7 billion. AT&T's liquidity is strong. To back its commercial paper program, AT&T currently has a five-year credit facility that expires in July 2011 with $10 billion of availability. AT&T has an option to increase the $10 billion amount to $12 billion, with agreement by the lending banks. The principal financial covenant requires debt-to-EBITDA, as defined in the agreement, to be no more than 3x. At the end of the third quarter of 2007, AT&T revised its guidance for 2007 free cash flow to $6 billion - $7 billion, up from a revision at the end of the second quarter of $5 billion - $6 billion. Original guidance provided at the start of the year was for 2007 free cash flow to be in the $4 billion - $5 billion range. Fitch believes free cash flow could further strengthen in 2008, given potential additional merger synergies and continued growth in wireless and enterprise service revenues. In aggregate over 2007 and 2008, some borrowing is likely to be needed due to the recently completed Dobson Communications Corp. acquisition and the spectrum purchase from Aloha Partner, L.P. in 2008 as well as to make further share repurchases.

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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