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18 Nov 2005
MOODY'S CONFIRMS ALL RATINGS OF SBC, UPGRADES AT&T EURO NOTES TO A2 AND OTHER AT&T DEBT TO Baa2; OUTLOOK STABLE.
Approximately $32 billion of debt securities affected.
New York, November 18, 2005 -- Moody's Investors Service confirmed all ratings of SBC Communications
Inc. ("SBC") and subsidiaries, upgraded the senior
unsecured rating for AT&T Corp ("AT&T")'s 7.75%
(original 6% coupon) Euro Notes due November 2006 to A2 from Ba1,
and upgraded all other debt of AT&T to Baa2 from Ba1. The outlook
for all ratings is stable. This action reflects the successful
acquisition of AT&T by SBC and SBC's unconditional and irrevocable
guarantee of AT&T's 7.75% Euro Note due November
2006, resolving the reviews initiated in early 2005 when the acquisition
The AT&T Euro Note rating is based on SBC's announcement that
it will provide an unconditional and irrevocable guarantee of that debt
issue at closing. The upgrade to Baa2 for the unguaranteed portion
of AT&T's debt represents Moody's view of the standalone
rating of AT&T and a two notch upgrade for both the synergy benefits
of being associated with SBC as well as Moody's perception of SBC's
likely willingness to financially support AT&T should it be required.
SBC's rating primarily reflects the new company's ability
to generate more cash flow than is necessary to further reduce leverage
over the next few years, despite its current dependence on the challenged
wireline telephony sector. Moody's believes that SBC will
likely benefit from a significant increase in cash flow from Cingular
which will offset pro-forma wireline cash flow declines caused
by the near-term declines in AT&T's business and increased
spending on SBC's wireline network upgrade
Moody's believes that SBC will be able to generate over $20
billion of cash from operations (after Moody's standard adjustments)
and over $5 billion of free cash flow by 2007, with which
it could reduce estimated 2005 ending debt of approximately $46
billion (SBC plus 60% of Cingular and 100% of AT&T).
Moody's expects measures of cash flow to drop in 2006 as SBC incurs
merger-related restructuring costs and higher network spending
on its own network upgrade ("Project Lightspeed").
Moody's also expects SBC consolidated debt/EBITDA to trend down
slightly through both measured debt reduction and modest growth in EBITDA.
Moody's expects management to continue its share buyback program
in order to manage consolidated debt/EBITDA towards a level of 1.5X.
It is likely that the company will reduce debt by over $2 billion
in 2005 and undertake share buybacks of a similar amount, and Moody's
believes this balanced approach to the use of cash flow for both debt
reduction and buybacks will continue over the next few years, and
consequently Moody's expects 2007 consolidated (including Cingular
on a proportionate basis) debt/EBITDA to approximate 1.5X,
funds from operations to debt to exceed 50%, (EBITDA-capital
expenditures)/interest to exceed 6X and free cash flow to debt of approximately
15% of adjusted debt.
Moody's remains concerned with SBC's revenue decline,
its weak return on assets (EBITA/assets), and relatively weak free
cash flow to debt metric at this rating level. Nevertheless,
Moody's believes that revenue declines may moderate once AT&T's
rapid loss of its non-strategic consumer business abates,
and enterprise revenues potentially stabilize due to industry consolidation
following several years of price-driven declines. While
SBC pays a significant portion of its cash flow in dividends, which
reduces free cash flow available for debt repayment, Moody's
recognizes that SBC's debt repayment is more a function of management's
willingness than ability to do so, and Moody's expects management
to vary its share buyback program as necessary to manage its capital structure
towards a target debt/EBITDA leverage range of approximately 1.5X.
The ratings of SBC and subsidiaries are stable as Moody's expects
stable cash flow by 2007, which will be in excess of funds needed
to achieve a proportionately consolidated debt/EBITDA (after Moody's
standard adjustments) ratio of approximately 1.5X. Moody's
would expect management to reduce funds used for share buybacks should
EBITDA be pressured in the future.
The ratings could be upgraded if SBC were to demonstrate sustainable material
top line growth in its consolidated wireline businesses while keeping
margins relatively stable, and Cingular were to demonstrate above
industry average operating performance (revenue growth, churn,
margins), coupled with a demonstrated willingness by management
to manage the firm's capital structure to stronger credit metrics
than are currently expected by Moody's.
The ratings might be downgraded if 1) SBC is unable to produce the AT&T
synergy benefits they've announced (trending to more than $2
billion/year by 2008), or 2) Cingular's operating performance
doesn't trend towards industry averages, or 3) SBC's
wireline business proves incapable of at least modest growth and maintenance
of existing margins or 4) SBC makes a material acquisition in a manner
that causes a deterioration in projected credit metrics.
SBC currently guarantees $5.2 billion of subsidiary debt
only so long as it maintains 100% ownership of the guaranteed subsidiary.
Moody's requires sufficient financial information on those subsidiaries
in order to assign a standalone rating to those entities, or in
the absence of such information, an unconditional and irrevocable
guarantee from SBC. Unless SBC chooses to provide either subsidiary
financial information or an unconditional guarantee by the end of 2005,
Moody's will be required to withdraw those existing subsidiary ratings.
This requirement also applies to AT&T debt ratings.
Please refer to Moodys.com for additional research.
Ratings affected by this action:
SBC Communications Inc.
Senior Unsecured, A2 (confirmed) $15.2 billion
Commercial Paper, P-1 (confirmed) $ 2.7 billion
SBC Communications Capital Corp.
Senior Unsecured, A2 (merged into parent) $250 million
Southwestern Bell Telephone Co.
Senior Unsecured, A2 (unconditionally gteed)
7%, due 2015 $250 million
Senior Unsecured, A2 (conditionally gteed) $1.3 billion
Pacific Bell Telephone Co.
Senior Unsecured, A2 (unconditionally gteed)
7-1/8%, due 2026 $625 million
6-5/8%, due 2034 $550 million
Senior Unsecured, A2 (conditionally gteed) $1.25 billion
Ameritech Capital Funding Corp.
Senior Unsecured, A2 (conditionally gteed) $2.1 billion
Indiana Bell Telephone Co.
Senior Unsecured, A2 (conditionally gteed) $150 million
Michigan Bell Telephone Co.
Senior Unsecured, A2 (conditionally gteed) $200 million
Southern New England Telephone Co.
Senior Unsecured, A2 (conditionally gteed) $110 million
Wisconsin Bell, Inc.
Senior Unsecured, A2 (conditionally gteed) $125 million
Corporate Family Rating, withdrawn (now a subsidiary of SBC)
SGL liquidity rating, withdrawn
Issuer rating, withdrawn
Eurobond, 7.75% (original 6% coupon) due November
2006, A2 (changed from Ba1)
(SBC promise to unconditionally gtee) $850 million (equiv.)
Other debt (not guaranteed), Baa2 (changed from Ba1) $6.8
SBC Communications Inc. is a telecommunications company headquartered
in San Antonio, Texas, and AT&T Corp is a telecommunications
company headquartered in Bedminster, New Jersey.
Donald S. Carter CFA
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
Corporate Finance Group
Moody's Investors Service
No Related Data.
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