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Rating Action:

MOODY'S CHANGES RATINGS, OUTLOOKS OF SOME VERIZON SUBSIDIARIES; AFFIRMS PARENT, VERIZON COMMUNICATIONS; REVIEWS OR AFFIRMS OTHER SUBS

06 Dec 2004
MOODY'S CHANGES RATINGS, OUTLOOKS OF SOME VERIZON SUBSIDIARIES; AFFIRMS PARENT, VERIZON COMMUNICATIONS; REVIEWS OR AFFIRMS OTHER SUBS

Approximately $40B of Debt Affected

New York, December 06, 2004 -- Moody's Investors Service has downgraded to A2 the senior unsecured debt ratings of GTE Southwest, Verizon New England, and Verizon South, while confirming at A1 the rating of Verizon North. The rating outlooks are negative for GTE Southwest and for Verizon New England (except Series B debentures guaranteed by Verizon Communications), while the outlook for Verizon South is stable. The outlook for the confirmed ratings of Verizon North is now positive.

In addition to the rating actions noted above, which conclude a review initiated on August 26, 2004, Moody's today initiated a review for downgrade of the Aa3 long-term debt ratings of Verizon Pennsylvania and Verizon New Jersey. The long-term debt ratings (Baa1 sr. unsecured) of Verizon Hawaii remain on review for possible downgrade, pending clarity on the treatment of its outstanding debt upon the company's acquisition by the Carlyle Group.

The rating agency also changed the outlook on three other Verizon operating companies. The rating outlook of the company's 55% owned subsidiary, Verizon Wireless has been changed to positive from stable. The ratings outlooks of Verizon Virginia and Verizon Maryland have been changed to negative from stable.

Moody's affirmed at current levels all ratings and rating outlooks of the parent company, Verizon Communications, and of the rest of its subsidiaries, including Verizon New York, NYNEX, GTE Corporation, and the two funding subsidiaries. A complete list of ratings and rating actions follows at the end of this press release.

Rationale for rating changes

The downgrades and negative outlooks of Verizon New England and GTE Southwest reflect our expectation that competition, technology substitution and a high cost structure, especially at Verizon New England, will limit the ability of both companies to stabilize earnings and improve credit metrics. The downgrade of GTE Southwest also reflects the fact that debt levels were not reduced commensurate with the decline in revenues and earnings that resulted from access line sales.

Relatively high debt burdens exacerbate the weakening credit profile at both operating companies. In addition, an expensive network upgrade will limit improvement in coverage ratios as measured by EBITDA-CAPEX/Interest Expense. Should access line losses remain above a 5% annual rate or EBITDA margins fail to improve to 45% in the next quarter, additional rating pressure could develop.

The downgrade of Verizon South is likewise based on a failure to reduce debt levels commensurate with the decline in revenues and earnings from access line sales. The stable outlook is based on our expectation that access line losses will remain below 3% and EBITDA margins above 45%. However, should access line losses accelerate or margins deteriorate below noted levels, rating pressure could develop.

The ratings of Verizon North have been confirmed pending clarity on the access lines that Verizon may sell, spinoff or otherwise divest. The positive outlook reflects Verizon North's strong operating performance, robust credit metrics and declining rates of access line loss due to its less densely populated service territory (compared to many of the other Verizon telephone operating companies). The rating could be upgraded once Verizon Communication's access line disposal plans are clear, provided that revenues generated from software sales to affiliates continue to offset declines in traditional wireline operations at VZ-NO.

Focus of the new reviews

The reviews of Verizon New Jersey and Verizon Pennsylvania are prompted by Moody's concern that accelerating access line losses, currently over 5% annually, may erode revenues, earnings and cash flow much faster than expected.

The reviews for these companies will focus on : 1) the companies' abilities to stem access line losses and revenue declines in the face of increasing competition -- particularly in the higher teledensity and more affluent service regions; 2) the ability and willingness of Verizon to reduce total debt at these operating companies commensurate with declines in cash flow; 3) the likelihood that credit metrics will continue to deteriorate over the next few years absent a significant debt reduction; and 4) the impact that the FTTP network upgrade and the requisite capital investment will have on free cash flow.

Ratings for the two companies could be downgraded if line losses remain greater than 5% or if EBITDA margins drop below 45% over the next quarter.

Rationale for select outlook changes

The positive ratings outlook on Verizon Wireless is based upon Moody's expectation that: 1) continued strong subscriber growth and one of the lowest cost structures in the industry will enable the company to grow earnings and cash flows rapidly; 2) the bulk of near-term spectrum needs have already been met; 3) rapid deleveraging will begin in late 2005; and 4) should Vodafone exit the partnership, in whole or in part, Verizon will fund it in a manner that preserves balance sheet strength at Verizon Wireless.

If Verizon Wireless can continue growing revenues close to 20%, sustain an EBITDA margin greater than 40% and reduce debt beginning in the second half of 2005 (after reasonable capital expenditures), its ratings could improve. Conversely, Verizon Wireless ratings could fall if its balance sheet weakens significantly, (Debt/EBITDA exceeds 3.0 times) as a result of Vodafone's exit from the partnership.

The negative ratings outlooks on Verizon Virginia and Verizon Maryland are based on Moody's concern that access line losses, currently around 3.5% annually, may accelerate and erode revenues, earnings and cash flows faster than expected. The rating of either company could be placed on review for possible downgrade should access line losses reach 4% annually or if EBITDA margins fall below 45%. Conversely, the ratings outlooks could stabilize if access line losses decline to less than 3% annually and EBITDA margins well exceed 45%.

Underpinnings of the stable outlooks

The affirmation of the parent company's ratings and the stable outlook are based on the strong performance of Verizon Wireless coupled with a significant focus on deleveraging. Moody's believes that rapidly expanding competition and an expensive, but necessary, wireline network upgrade will increasingly erode the free cash flow generating capacity of the company's traditional wireline operations. However, rapidly improving profitability at Verizon Wireless, coupled with continued debt reduction, is expected to enable Verizon Communications to improve its credit metrics. Moody's notes that the directory business remains very profitable and generates significant free cash flow, which supports debt reduction.

The stable rating outlook on Verizon New York acknowledges the steps the company has taken to generate free cash flow by cutting its dividend to the parent, Verizon Communications. Moody's also expects that over the next few years the company will be substituting external debt for intra-company debt -- a modest credit positive, all other things being equal.

Nonetheless, Moody's expects that VZ-NY's free cash flow will remain under pressure for some time, given the likelihood that revenues will continue to slide because of access line losses, that much of the company's cost structure is fixed, and that it faces the expense of a network upgrade.

The stable rating outlooks on Verizon West Virginia, Verizon Delaware, Verizon Washington, D.C., Verizon California, Verizon Florida and Verizon Northwest recognize their relatively strong balance sheets and coverage ratios for their respective ratings. However, should access line losses accelerate to 4% annually or should EBITDA margins drop below 45% ratings pressure could develop.

The A2 debt rating of NYNEX is based on the assumption of its debt by Verizon Communications. The A3 debt rating of GTE Corporation reflects the fact that the guarantee of the GTE debt is not immediately enforceable against Verizon Global Funding Corp., the guarantor.

Verizon Hawaii's ongoing review

The ratings of Verizon Hawaii's long-term debt remain on review for possible downgrade pending clarity on the treatment of the outstanding debt. In May 2004, Carlyle Group announced that it will purchase Verizon-Hawaii for $1.65 billion in cash, adjusted for external debt at the time of closing. At least $125M of the $425M of rated debt is expected to mature prior to closing. Moody's will assess the possibility that Verizon Hawaii's debt could be redeemed by Verizon Communications or defeased by the Carlyle Group prior to closing. Should the debt remain outstanding after the transaction closes, it is likely that its ratings would be downgraded to well below investment grade levels.

Complete list of rating actions

Ratings downgraded are:

Verizon New England, Inc.: notes and debentures to A2 from Aa3, outlook negative on all long-term debt except the $480M of Series B debentures, due 2042, which has a stable rating outlook as it benefits from an unconditional and irrevocable guarantee from Verizon Communications.

GTE Southwest, Inc.: first mortgage bonds to A1 from Aa3, notes and debentures to A2 from A1, negative outlook

Verizon South, Inc.: debentures to A2 from A1, stable outlook

Ratings confirmed are:

Verizon North, Inc.: Aa3 first mortgage bonds, A1 debentures, positive outlook

Ratings placed on review for possible downgrade are:

Verizon New Jersey, Inc.: Aa3 debentures

Verizon Pennsylvania, Inc.: Aa3 debentures

Ratings remaining on review for possible downgrade :

Verizon Hawaiian Telephone Company, Inc.: Baa1 debentures

The outlook on the following companies was changed to negative from stable:

Verizon Maryland, Inc.: Aa3 debentures.

Verizon Virginia, Inc.: Aa3 debentures and notes

The outlook on the following debt was changed to positive from stable:

Verizon Wireless Capital LLC: A3 senior unsecured

The following ratings were affirmed with stable outlooks:

Verizon Global Funding Corp.: A2 senior unsecured, Prime-1 short-term

Verizon Network Funding: Prime-1 short-term

NYNEX Corporation: A2 senior unsecured

GTE Corporation: A3 senior unsecured

Verizon West Virginia, Inc.: Aa3 debentures

Verizon Washington, D.C., Inc: Aa3 debentures

Verizon Delaware, Inc.: Aa3 debentures

Verizon Northwest, Inc.: A1 debentures

Verizon California, Inc.: A1 debentures

Verizon Florida, Inc.: A1 debentures

Verizon New York, Inc.: Baa2 notes and debentures

Verizon Communications is a regional Bell operating carrier, headquartered in New York City.

New York
Dennis Saputo
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Julia Turner
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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