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Fitch Assigns 'A' Rating to AT&T's $2B Debt Offering

Posted on: Thursday, 1 February 2007, 18:00 CST

Fitch Ratings has assigned an 'A' rating to AT&T Inc.'s (AT&T) issuance of $1.5 billion of senior unsecured floating-rate notes and $500 million senior unsecured notes in a reopening of its 5.625% notes due in 2016. The proceeds are expected to be used for general corporate purposes, including repurchases of common stock under its previously announced share repurchase plan. The Rating Outlook is Stable for all ratings.

On Sept. 21, 2006, following a review of AT&T's expected merger with BellSouth Corp. (BellSouth), Fitch affirmed AT&T's 'A' Issuer Default Rating (IDR), 'A' senior unsecured debt rating, 'A' bank credit facility rating and 'F1' commercial paper rating and assigned a Stable Rating Outlook. The ratings were removed from Rating Watch Negative where they had been placed upon the announcement of the merger on March 6, 2006.

AT&T merged with BellSouth in December 2006. AT&T's ratings reflect AT&T's diversified revenue mix, its significant size and economies of scale as the largest wireline, wireless and enterprise services operator in the U.S., as well as Fitch's expectation that AT&T will benefit from continued growth in operating cash flow in its wireless operations (formerly Cingular Wireless, LLC). Fitch believes AT&T will benefit from having full control of its wireless operations (it previously shared joint control with BellSouth) as well as benefit from its strong position in the wireless industry. Fitch also notes that following the consummation of the merger, AT&T's exposure to the increasingly competitive consumer market will approximate a relatively manageable 23% of revenues.

The rating also incorporates Fitch's expectations that AT&T will maintain leverage in a range appropriate for the current rating category. Credit protection metrics, in the form of debt-to-EBITDA are expected to be in the 1.5 times (x)-1.6x range in 2007, and decline slightly thereafter. With respect to the merger with BellSouth, Fitch expects AT&T to derive operating cost synergies as it integrates the two companies. Annual synergies are now expected to range from $2.6 billion-$3 billion in 2008, up from a $2 billion run-rate basis.

During the course of 2007, Fitch will continue to monitor AT&T's progress on integrating operations and achieving the synergies from the BellSouth merger and 2005 AT&T Corp. transaction. Over the next couple of years, AT&T will also need to make good progress on deploying its video strategy as it seeks to improve its consumer retail competitive position vis-a-vis cable multiple system operators that have deployed telephony service.

At yearend 2006, AT&T's debt stood at $60.9 billion and cash amounted to $2.4 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&T's current guidance calls for free cash flow in the $4 billion-$5 billion range for 2007. As Fitch has previously noted, free cash flow in 2007 will be directed to stock repurchases as the company completes its $10 billion stock-repurchase plan by the end of 2007. Approximately $7.3 billion remains on its repurchase authorization. Fitch expects free cash flow to be available for debt reduction in 2008.

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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