MOODY'S CONFIRMS DEBT RATINGS OF BELL ATLANTIC AND MOST SUBSIDIARIES; RAISES DEBT RATINGS OF GTE AND SUBSIDIARIES. NEW YORK TELEPHONE UPGRADED. MERGED COMPANY TO BE KNOWN AS VERIZON COMMUNICATIONS
Moody's Investors Service has confirmed the long-term debt ratings of Bell Atlantic Corporation (BAC), its supported affiliates, and all of Bell Atlantic's telephone subsidiaries, with the exception of New York Telephone, whose long-term debt ratings were raised. The long-term debt ratings of GTE Corporation, its supported affiliates, and all its telephone subsidiaries were upgraded. The short-term debt rating of GTE is also upgraded. The outlook for all ratings is stable. The short-term debt ratings of Bell Atlantic, its supported affiliates and all other GTE subsidiaries were confirmed earlier when the two companies announced their plans to merge in a stock for stock transaction. A complete table of the new and prior ratings follows.
These ratings actions are based on Moody's expectation that the merged enterprise, to be named Verizon Communications, will sustain strong credit metrics based on the robust cash flows generated by its local wireline properties, increasing cash flows from its domestic wireless joint venture and a commitment to sustain balance sheet strength as the company grows its business. The new ratings also recognize that competition is increasing rapidly in all business segments, that the "recapture" of Genuity within the next five years is likely to stress the balance sheet, and that the integration of the two organizations will be challenging but has the potential to produce significant synergies. We expect the merger to close within the next few days as no additional approvals are required.
In order to comply with the long distance provision restrictions of the Telecommunications Act of 1996, the merger conditions mandated that Verizon reduce its ownership in Genuity, GTE's internet infrastructure and services provider, to less than 10% until it has opened Bell Atlantic's local markets to competition, thus gaining approval to offer long distance service in these markets. An IPO for 90% of Genuity is expected to close shortly. However, Verizon retained an option, exercisable for five years, to increase its ownership in Genuity back up to about 80% once it gains approval to offer long distance service throughout the former Bell Atlantic markets. We believe that the exercise of this option has a very high probability of occurring since the long-term financial potential of Genuity's rapidly growing business is very significant. Thus, we have overlaid a "recapture" of Genuity by Verizon in our ratings.
Genuity anticipates that it will require up to $13 billion in capital for network expansion over the next five years. In addition, Genuity will need to fund significant operating losses, which we estimate could approach $1.0 billion during each of the next two years. Genuity expects that a very large portion of this capital requirement will be debt financed.
The recapture of Genuity will utilize a significant amount of the balance sheet flexibility that is available to Verizon at this rating level. Consequently, we believe that additional investments or acquisitions will be moderate in scope and that should larger opportunities present themselves, they will be financed in a manner that preserves balance sheet strength.
The domestic local telephone operations, by far Verizon's largest asset, are expected to grow cash flows about 5% annually and provide in excess of 70% of consolidated EBITDA over the next few years. We anticipate a continuation of this strong level of performance due to an increasingly efficient network design (which lowers both transport and maintenance costs), improving marketing initiatives, new product introductions, increasing demand growth, generally balanced regulatory relationships and improvements in operational efficiency, a large percentage of which should result from merger synergies.
Group capital spending is likely to continue trending upward in response to efficiency driven investment and accelerating demand for broadband services. Competition is expanding rapidly and is taking retail market share but a growing wholesale business, in addition to overall market growth, offsets some of these losses. Verizon's dividend policy for its local telephone companies will be a continuation of Bell Atlantic's former policy which results in no material new debt being issued by these subsidiaries. Consequently, we expect the local telephone subsidiaries to sustain very strong credit metrics while providing the parent company with well over $5.0 in dividends annually.
Moody's expects that the domestic telephone subsidiaries of the combined enterprise will continue to finance on a stand alone basis for some time. The senior long-term debt ratings of New York Telephone were raised to reflect our assessment of its heightened strategic value as a result of interLATA market entry approval and its relatively large contribution to the new enterprise. GTE Hawaii's long-term debt ratings were raised to reflect its ownership by a stronger enterprise. The ratings of GTE Hawaii also reflect our view that it is much less strategic to the new enterprise than NYT. Because the financial performance of these two companies is not as strong as Verizon's other telephone subsidiaries, we have rated them somewhat lower than the other telephone subsidiaries.
Verizon Wireless, by far the largest wireless provider in the U.S. and 55% owned by Verizon, is expected to significantly grow its operating cash flow as it capitalizes on robust demand growth and its low cost structure. Its cost structure benefits from a network which is 75% digital and is based on the most efficient and economical digital standard, CDMA. The largest national network footprint, covering 90% of the population, minimizes roaming costs which is increasingly important given the trend toward national service offerings. In addition, excellent distribution channels including a high percentage of low cost direct distribution, improving operating efficiencies and strengthened purchasing power as a result of the merger are expected to allow the company to offset accelerating competitive challenges and sustain cash flow margins close to current levels.
Robust demand growth is expected to be fueled in part by increasing demand for wireless data services in addition to continued strong demand growth for wireless voice services. Consequently, capital spending is expected to remain at least at current levels for several years. The ratings reflect our expectation that the current business model will be self funding and provides an opportunity for dividend increases.
However, to capitalize on the longer-term potential of the developing wireless data opportunity, wireless providers are seeking to expand both their coverage and spectrum ownership. Wireless spectrum auctions are currently scheduled for the third quarter of this year. While we believe that Verizon Wireless will be an active participant in this process, its current large network footprint, its scaleable CDMA digital standard and an expectation for rational bidding should keep this incremental capital requirement manageable. The ratings reflect our expectation that proceeds from a partial IPO of Verizon Wireless (expected later this year) will be sufficient to meet the capital requirements associated with any spectrum and footprint expansion.
International investments, in addition to a highly profitable domestic directory business and the beginnings of an in-region interLATA long distance business, are the other significant components of Verizon's current operations.
Moody's believes that the company will seek to focus its international investments on wireless and data opportunities in Latin America and Europe and that it will continue to be disciplined in further expansion of this segment as its strategic priority is the domestic market. In addition, Verizon's ratings reflect our expectation of a rationalization of international investments, specifically the Cable and Wireless Communications and Telecom Corporation of New Zealand stakes, to provide near-term support to the balance sheet.
We expect the directory business to remain very profitable as the company responds to competitive challenges and expands into electronic distribution. As approvals are granted to enter the in-region long distance business we look to this segment to provide an enhancement of competitive position through the ability to offer a bundled product set.
The ratings confirmed are:
Bell Atlantic Financial Services, Inc. (to be known as "Verizon Global Funding") -- medium-term notes and notes, rated A1; shelf registration of debt securities, rated (P)A1; issuer rating, A1.
Bell Atlantic Global Funding Corp. (to become a part of "Verizon Global Funding) -- medium-term notes, rated A1.
Bell Atlantic Systems Leasing International -- medium-term notes, rated A1.
Bell Atlantic Tricon Leasing, Inc. -- medium-term notes, rated A1.
Bell Atlantic New Zealand Holdings, Inc. -- preferred stock, rated "a2".
Bell Atlantic-New Jersey, Inc.-- debentures, rated Aa2, and shelf registration of debt securities rated (P)Aa2.
Bell Atlantic-Pennsylvania - debentures, rated Aa2; shelf registration of debt securities rated (P)Aa2.
Bell Atlantic-West Virginia - debentures, rate Aa2; shelf registration of debt securities rated (P)Aa2.
Bell Atlantic- Maryland - debentures, rated Aa2; shelf registration of debt securities rated (P)Aa2.
Bell Atlantic- Washington, D.C. - debentures, rated Aa2, ; shelf registration of debt securities rated (P)Aa2.
Bell Atlantic-Virginia - debentures and notes, rated Aa2; shelf registration of debt securities rated (P)Aa2.
Bell Atlantic- Delaware - debentures, rated Aa2.
Prefco IX Limited Partnership - secured notes, rated A1.
New England Telephone and Telegraph Company - Notes, debentures, and MOPPRS, rated Aa2; shelf registration of debt securities rated (P)Aa2.
NYNEX Corporation-- debentures, rated A2; issuer rating, A2.
Bell Atlantic Capital Funding (formerly known as "NYNEX Capital Funding Company") -- medium-term notes and issuer rating, rated A2.
Bell Atlantic Credit Company (formerly known as "NYNEX Credit Company") -- medium-term notes and issuer rating, rated A2.
Ratings raised are:
GTE Corporation --senior unsecured debentures and senior unsecured notes, to A2 from Baa1; issuer rating to A2 from Baa1; and the company's short-term rating, to Prime-1 from Prime-2.
GTE Corp. Savings Plan Trust --guaranteed ESOP notes, to A2 from Baa1.
GTE Finance Corporation -- medium-term notes, to A2 from Baa1.
GTE North Incorporated - first mortgage bonds, to Aa2 from A1; debentures, to Aa3 from A2; shelf registration of debt securities, to (P)Aa3 from (P)A2; Telephone Facility Lease Bonds, to Aa3 from A2.
GTE Northwest Incorporated - first mortgage bonds, to Aa2 from A1; debentures, to Aa3 from A2; shelf registration of debt securities, to (P)Aa3 from (P)A2.
GTE California Incorporated - first mortgage bonds, to Aa2 from A1; debentures, to Aa3 from A2.
GTE Hawaiian Telephone Company, Inc. -- first mortgage bonds, to A2 from Baa1; and debentures, to A3 from Baa2.
GTE Southwest Incorporated - first mortgage bonds, to Aa2 from A1; notes and debentures, to Aa3 from A2; shelf registration of debt securities, to (P)Aa3 from (P)A2.
GTE South Incorporated - first mortgage bonds, to Aa2 from A1; and debentures, to Aa3 from A2; shelf registration of debt securities, to (P)Aa3 from (P)A2.
GTE Florida Incorporated - debentures, to Aa3 from A2; shelf registration of debt securities, to (P)Aa3 from (P)A2.
New York Telephone Company -- first mortgage bonds, to Aa3 from A1; notes and debentures, to A1 from A2; shelf registration of debt securities, to (P)A1 from (P)A2.
Ratings previously confirmed are:
The Prime-1 short-term debt rating for commercial paper of Bell Atlantic Financial Services, Inc., Bell Atlantic Network Funding Corporation (to be known as "Verizon Network Funding"), GTE North Incorporated, GTE Northwest Incorporated, GTE California Incorporated, GTE Southwest Incorporated, GTE South Incorporated, GTE Florida Incorporated, GTE Midwest Incorporated, and GTE Funding Incorporated.
Bell Atlantic Corporation and GTE Corporation are international providers of wireline and wireless communications services and are headquartered in New York, NY, and Dallas, Texas, respectively.
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