Fitch Assigns ‘A’ Rating to BellSouth Debt Offering

Fitch Ratings has assigned an ‘A’ rating to BellSouth Corp.’s (BellSouth) offering of $1.2 billion of two-year floating rate notes maturing Aug. 15, 2008. A portion of the proceeds will be used to repay the $1 billion 5% notes due Oct. 15, 2006 and pay down commercial paper. BellSouth’s ‘A’ issuer default rating (IDR), senior unsecured debt rating, and bank credit facility rating as well as its ‘F1′ short-term rating, have been on Rating Watch Negative since March 6, 2006, due to the pending merger with AT&T Inc. AT&T plans to acquire BellSouth for approximately $67 billion in common stock and the assumption of approximately $17 billion in debt. Fitch expects to resolve the Rating Watch and final rating concurrent with the completion of the merger.

Due to the pending merger, BellSouth’s final IDR and ratings assigned to its senior unsecured debt will be tied to the prospects for the combined AT&T and BellSouth. AT&T’s IDR is also ‘A’ and its IDR and securities are also on Rating Watch Negative pending Fitch’s need to evaluate the financial implications of the merger, the synergies to be realized, the costs to integrate the companies and the ultimate capital structure and financial policies of the combined company. As the transaction is currently envisioned, Fitch anticipates the ratings would either be affirmed or, if downgraded, a downgrade would be limited to one notch. The final ratings will depend on an evaluation of the combined company’s prospective credit profile.

AT&T and BellSouth expect to achieve $2 billion in synergies in 2008 on an annual run rate basis, with the level of synergies exceeding $3 billion annually by 2010. Concurrent with the announcement, AT&T announced plans to repurchase $10 billion in common equity by the end of 2007. There are also expected to be costs incurred to integrate the two companies, with a range of $2.4 billion to $2.7 billion to be spent on operating and capital expenses in the initial year of the merger (2007) but stepping down significantly thereafter. Leverage for 2005 pro forma for the acquisition of BellSouth, AT&T Corp. for the full year and the resulting consolidation of Cingular was approximately 1.7 times (x), which is moderately high for the current rating. Over time, Fitch would expect the combined company to realize synergies, which will contribute to EBITDA growth, however in the near term debt levels could increase with the stock repurchase program and the costs of integration.

The transaction is expected to close in the fourth quarter of 2006, following the customary regulatory approvals. In July 2006, AT&T’s and BellSouth’s shareowners approved the merger.

BellSouth’s current liquidity is provided by cash on hand, which amounted to $259 million at the end of the second quarter of 2006, and the company’s $3.0 billion, undrawn syndicated line of credit. The line of credit expires on April 29, 2008. The credit facility serves as a backup for the company’s commercial paper program. There are no covenants tied to ratings in the credit facility, and the principal financial covenant states that consolidated debt is not to exceed 3.0x consolidated EBITDA. The company has $2.1 billion remaining on a shelf registration.

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. The issuer did not participate in the rating process other than through the medium of its public disclosure.