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Fitch Assigns 'A+' Rating to BellSouth; Remains on Rating Watch Negative

Posted on: Thursday, 24 June 2004, 06:00 CDT

Fitch Ratings has assigned an 'A+' rating to the $700 million of 6.55% debentures due June 15, 2034 issued by BellSouth Corp. (BellSouth). The proceeds will be used to refinance $517 million outstanding of 7 3/8% quarterly interest bonds that mature Aug. 1, 2039 and will be called on Aug, 1, 2004 and to refinance debt that matured earlier this month. BellSouth's debt is currently on Rating Watch Negative.

The existing 'A+' rating balances BellSouth's strong free cash flows, driven by reduced construction spending, against the pressures on revenue and EBITDA arising from competition and prolonged weak demand for services in the large-business and wholesale segments. On the competitive front, the traditional wireline business of BellSouth and other incumbent local exchange carriers are experiencing product substitution from high-speed data services, including cable modems and digital subscriber lines (DSL), and wireless services. An important consideration in BellSouth's current rating is the financial flexibility resulting from its strong free cash flows, which has enabled the company to reduce debt over the past two years.

The Rating Watch Negative status was assigned on Feb. 17, 2004 following the announcement that Cingular Wireless, a joint venture between BellSouth and SBC Communications, will acquire AT&T Wireless in a $41 billion cash transaction. The Rating Watch Negative status reflects Fitch's concern regarding the leveraging effect of BellSouth's net funding commitment, which is currently approximately $15 billion, to be provided to Cingular. Existing cash, free cash flow, and proceeds from asset sales are expected to reduce BellSouth's anticipated external financing needs for the transaction to approximately $5 billion. A key transaction that is expected to reduce the external financing level vis-a-vis the $15 billion total commitment is the pending sale of BellSouth's Latin American assets to Telefonica Moviles.

In March, 2004, BellSouth signed a definitive agreement to sell its Latin American operations to Telefonica Moviles. The sale, when completed, will provide BellSouth with $4.2 billion in after-tax cash proceeds and remove $1.5 billion in debt from its consolidated balance sheet. Telefonica Moviles will assume debt associated with the acquired operations. The transaction is expected to close in the second half of 2004.

In reviewing the effect of the transaction on BellSouth's credit profile, Fitch will take into consideration the increase in leverage, how quickly and at what level BellSouth will be able to reduce leverage, and an evaluation of BellSouth's and the new Cingular's prospective operating performance, including the realization of synergies.

In 2003, BellSouth's debt-to-EBITDA was approximately 1.5 times (x). To maintain its current 'A+' rating following the close of Cingular's acquisition of AT&T Wireless, Fitch would like to see BellSouth's debt-to-EBITDA return to the 1.5x-1.6x level within twelve-eighteen months following the close of the Cingular/AT&T Wireless transaction.

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