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
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
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
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
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,
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,
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.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Corporate Finance Group
Moody's Investors Service