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Fitch Rates AT&T's Proposed Debt Issuance 'A'; Outlook Stable
Fitch Ratings has assigned an 'A' rating to AT&T's proposed offering of five-year senior unsecured debt. Proceeds will be used for general corporate purposes. The Rating Outlook is Stable.
Key factors considered in AT&T's ratings include the company's diversified revenue mix, its significant size and economies of scale as the largest telecommunications operator in the U.S., and Fitch's expectation that AT&T will benefit from continued growth in wireless operating cash flows. Demand for wireless and wireline data services, which are key growth areas for AT&T, is expected to remain relatively strong. AT&T's revenue mix continues to become increasingly weighted to growth areas as wireless services and wireline data/managed services comprised 71% of consolidated revenues in the second quarter of 2010, up from 66% the prior year and 61% two years ago.
Embodied in AT&T's ratings is Fitch's view that the company has the financial flexibility to maintain leverage over the long term at around 1.5 times (x), which is down from the 1.74x recorded in 2009. Fitch estimates that by the end of 2010 EBITDA growth combined with moderate debt reduction will return AT&T's net debt-to-EBITDA metric for the full year back to the company's target of 1.5x or below, and at or below the lower end of a 1.5x-1.7x gross debt-to-EBITDA range expected by Fitch for this rating category. Improvements in leverage in 2010 will be moderated by the acquisition of certain wireless properties from Verizon for $2.35 billion in the second quarter of 2010.
Fitch's ratings incorporate that, over the next few years, AT&T will have the financial flexibility to make investments in wireless spectrum, should it become available, in order to maintain its competitive position in the wireless business. Fitch also recognizes that at some point AT&T may return to stock repurchases, if investments in spectrum or other areas are not available, within the context of maintaining leverage at around 1.5x.
Fitch believes issues to monitor regarding AT&T's ratings include competition in the consumer wireline business, mainly for voice services, and the effect of an expected weak economic recovery on its lines of business. Historically the recovery in wireline business customer revenue has lagged the recovery in the economy overall. Growth in employment levels, as well as a rebound in fixed investment related to telecom, will be important catalysts to business service revenue growth from large customers. For small business customer revenues to return to growth, business formation rates must improve, and to some extent this will hinge on better capital availability for these customers. To offset the effects of competition and economic conditions on cash flow, AT&T must continue to be successful in controlling costs and in scaling its network-based video offering.
Total debt outstanding declined to approximately $70 billion at June 30, 2010 from approximately $72.1 billion at the end of 2009. Long-term debt maturing in the second half of 2010 is approximately $1 billion. In 2011 and 2012, maturities (including debt that can be put to AT&T) total $8.6 billion and $5.5 billion, respectively. Fitch expects AT&T to refinance a portion of its maturing debt, with the balance reduced through the generation of free cash flow (FCF).
Liquidity is provided by cash and FCF, and additional financial flexibility is provided by availability on the company's revolving credit facility. Cash on the balance sheet on June 30, 2010 amounted to $1.4 billion and for the last 12 months AT&T generated $6.5 billion in FCF (net cash provided by operating activities less capital expenditures and dividends). AT&T has an undrawn five-year credit facility that expires in July 2011 with $9.465 billion of availability; the company has a right under the agreement to raise the commitment to as much as $12 billion. The principal financial covenant requires debt to EBITDA, as defined in the agreement, to be no more than 3x.
Capital spending is expected to rise in 2010 to a range of $18 billion to $19 billion from the $17.3 billion spent in 2009. Reinforcing its strong competitive position in the wireless business and continued U-verse related spending will remain priorities of AT&T's 2010 capital spending. Higher capital expenditures, higher cash taxes, and working capital needs are expected to reduce FCF from 2009 levels, when approximately $7.4 billion was recorded.
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