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Global Credit Research - 19 Oct 2012
New York, October 19, 2012 -- AT&T's A2 senior unsecured ratings, P-1 short term
rating and stable outlook are not impacted by its recent announcement
that it will contribute $8.0 billion par value of preferred
equity in AT&T Mobility II to fund its underfunded pension obligation.
Moody's views the preferred equity issued by AT&T Mobility II
to be debt-like due to its cash interest payments and embedded
put and call options, which Moody's views as inconsistent
with permanent equity capital. But, because Moody's
recognizes underfunded pension obligations as debt, the reduction
of the pension shortfall will fully offset the incremental debt from this
new preferred equity and result in no change to Moody's adjusted
The significant tax benefits from this transaction will boost free cash
flow, and will offset the potentially negative impact of the end
of bonus depreciation. AT&T contributed $1.0
billion to the pension in 2011, after many years without any meaningful
pension payments. The company has indicated that mandatory contributions
for 2012 are unlikely and forecasted $300 million for 2013 prior
to this transaction. Going forward, the preferred dividend
of $560 million (pre-tax) will be a cash outflow,
which Moody's will view as an interest payment.
Moody's estimates that the $8.0 billion 7%
coupon preferred equity represents a very minor stake in Mobility.
It is callable by AT&T after five years and putable after seven years
both at the higher of par or fair market value, but not more than
one-third of the stake can be put to AT&T per twelve month
period. The preferred equity can be settled in cash or AT&T,
Inc. common stock, at the company's option.
An independent third party will value the preferred equity stake,
which may fluctuate in value and impact the future funded status of the
The preferred equity will rank senior to AT&T Inc.'s
equity stake in Mobility II and all cash distributions or loans from Mobility
II will be prohibited if the preferred dividend is in arrears.
The senior ranking of the preferred equity stake, specifically its
priority claim to cash flows from Mobility II, effectively subordinates
unsecured debt at AT&T Inc. However, Moody's believes
that a large portion of the pension liability, primarily for plan
members with union affiliation, exists at the Operating Telephone
Company (OTC) level. In this sense, the OTC pension liability
is being offset (i.e. repaid) with debt at the Mobility
II operating company level and does not worsen the current degree of structural
subordination suffered by unsecured creditors at the parent.
For further information please see the issuer comment posted to www.moodys.com.
The principal methodology used in rating this issuer was Moody's Global
Telecommunications Industry Methodology, published December 2010.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
AT&T Inc. is the largest telecommunications company in the
US, is headquartered in Dallas, Texas.
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
MD - Corporate Finance
Corporate Finance Group
Moody's says AT&T's A2 ratings are not impacted by its pension funding plan
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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