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Fitch Assigns 'A+' Rating to BellSouth Notes; Stays on Rating Watch Neg

Posted on: Wednesday, 8 September 2004, 06:00 CDT

Fitch Ratings has assigned an 'A+' rating to BellSouth Corp.'s (BellSouth) proposed $3 billion offering of five- and 10-year senior unsecured notes. The proceeds will be used as part of BellSouth's share of the financing for Cingular Wireless' (Cingular) acquisition of AT&T Wireless. The rating remains on Rating Watch Negative following the announcement that Cingular, a joint venture between BellSouth (40% ownership in Cingular) and SBC Communications, Inc. (60% ownership), will acquire AT&T Wireless in a $41 billion cash transaction. The 'F1' commercial paper rating of BellSouth is not under review.

The existing 'A+' rating balances BellSouth's strong free cash flows, driven by reduced construction spending, and current debt leverage of approximately 1.5 times (x), 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 is 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 Negative Rating Watch, which was assigned on Feb. 17, 2004 following the announcement that Cingular will acquire AT&T Wireless, reflects the concern that BellSouth's proportion of the financing requirements will increase leverage for a sustained period above a level needed to maintain an 'A+' rating. Existing cash ($5.2 billion at June 30, 2004 net of cash applicable to discontinued operations), 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-$6 billion from a total commitment approximating $16 billion. A key transaction that is expected to reduce the external financing level vis-a-vis the $16 billion total commitment is the pending sale of BellSouth's Latin American assets to Telefonica Moviles.

BellSouth's sale of its Latin American operations to Telefonica Moviles is anticipated to provide BellSouth with $3.4 billion in cash proceeds after consideration of the $1.0 billion in cash held in the operations that will be transferred to Telefonica Moviles. In addition, Telefonica Moviles will assume debt totaling $1.4 billion associated with the Latin American operations. The transaction is expected to close in stages in the second half of 2004 and in early 2005. BellSouth may need modest levels of interim financing if the Cingular transaction closes before the sale of the Latin American operations is completed.

In the first half of 2004, BellSouth's debt-to-EBITDA was approximately 1.5x. 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 12-18 months following the close of the Cingular/AT&T Wireless transaction. Given the increased importance of wireless in BellSouth's operations following the close of Cingular's acquisition of AT&T Wireless, Fitch will incorporate the proportionate EBITDA and debt of Cingular in evaluating BellSouth's credit protection metrics.

Fitch believes the expansion of the wireless business in the longer term will mitigate the challenging condition in BellSouth's core wireline business.

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