MOODY'S CONFIRMS DEBT RATINGS OF BELL ATLANTIC (SR. AT A1) AND BELL ATLANTIC'S Aaa-RATED TELEPHONE SUBSIDIARIES; UPGRADES NYNEX DEBT RATINGS (SR. TO A2)
New York, 5/12/1997 -- Moody's Investors Service confirmed the A1 long-term debt ratings of Bell Atlantic Corporation (BAC) and its supported subsidiaries, and the Aaa long-term debt ratings of Bell Atlantic's telephone subsidiaries. In addition, Moody's raised the long-term debt ratings of NYNEX Corporation and its supported subsidiaries to A2 from A3 and their short-term ratings to Prime-1 from Prime-2. These actions complete a rating review begun on March 20, 1997.
Moody's believes that the Federal Communications Commission will approve the proposed merger of Bell Atlantic Corporation and NYNEX Corporation, and that the transaction will proceed as planned. NYNEX will survive the merger as a wholly owned subsidiary of Bell Atlantic.
The confirmation of the Bell Atlantic ratings is based on Moody's expectation that the performance of the new company's domestic telephone operations will be sustained and that the wireless operations will generate steadily increasing cash flows. Moody's also believes that the new Bell Atlantic will continue to demonstrate a balanced and focused approach toward diversification, and that the company will continue to maintain a strong credit profile.
The confirmation of the Aaa-rated telephone companies is based on Moody's expectation that they will maintain operating and financial profiles appropriate to the rating agency's highest rating. Moody's expects that they will continue to finance on a stand-alone basis, and that the financial policies adopted by the merged company's telephone subsidiaries will be identical to the former BAC's policies.
The upgrading of the long- and short-term ratings of NYNEX reflects the reduction of debt that will result from the eventual elimination of the commercial paper program at NYNEX and the likelihood that no new debt will be issued at the NYNEX level. Cash flow support for debt will continue to be derived from existing operations. The debt of NYNEX will not be assumed or guaranteed by Bell Atlantic.
The ratings confirmed are:
Bell Atlantic Corporation -- guaranteed ESOP notes, at A1.
Bell Atlantic Capital Funding Corporation -- medium-term notes and notes, at A1; shelf registration of debt securities, at (P)A1;
Bell Atlantic Financial Services, Inc.-- medium-term notes and notes, rated A1; shelf registration of debt securities; rated (P)A1; counterparty rating, A1.
Bell Atlantic Systems Leasing International -- medium-term notes, rated A1.
Bell Atlantic Tricon Leasing, Inc. -- medium-term notes, rated A1.
BAT Partners, L.P. -- secured notes, rated A1.
Bell Atlantic New Zealand Holdings, Inc. -- preferred stock, rated "a2".
Bell Atlantic-Delaware, Inc.-- debentures, rated Aaa.
Bell Atlantic-New Jersey, Inc.-- debentures, rated Aaa, and shelf registration of debt securities rated (P)Aaa.
Bell Atlantic-Virginia, Inc.-- debentures, rated Aaa, and shelf registration of debt securities rated (P)Aaa.
The Prime-1 short-term debt rating for commercial paper of Bell Atlantic Financial Services, Inc., Bell Atlantic Network Funding Corporation, New York Telephone Company, and New England Telephone and Telegraph Company were not on review and are confirmed. In addition, the long-term debt ratings of the following telephone operating companies were not on review and are confirmed:
Bell Atlantic - Pennsylvania, Inc. -- debentures at Aa1.
Bell Atlantic - Maryland, Inc. -- debentures at Aa2 and shelf registration of debt securities at (P)Aa2.
Bell Atlantic - West Virginia, Inc. -- debentures at Aa2 and shelf registration of debt securities a (P)Aa2.
Bell Atlantic - Washington, D.C., Inc. -- debentures at Aa3 and shelf registration of debt securities at (P)Aa3.
New York Telephone Company -- first mortgage bonds at A1, debentures and notes at A2, and shelf registration of debt securities at (P)A2.
New England Telephone and Telegraph Company -- debentures at Aa2.
Ratings upgraded are:
NYNEX Corporation-- debentures and medium-term notes, to A2 from A3; shelf registration of debt securities, to (P) A2 from (P) A3; counterparty rating, to A2 from A3, and short-term rating for commercial paper, to Prime-1 from Prime-2.
NYNEX Capital Funding Company-- medium-term notes, to A2 from A3, and counterparty rating, to A2 from A3.
NYNEX Credit Company-- medium-term notes, to A2 from A3, counterparty rating, to A2 from A3, short-term debt rating for commercial paper, to Prime-1 from Prime-2.
Moody's expects that over the next few years the operating performance of both BAC's and NYNEX's domestic telephone operations, which contribute 92% of EBITDA on a consolidated basis, will continue to be strong. Over the last two years, the combined domestic telephone operations have grown revenues by 6%, increased EBITDA by 15%, reduced interest expense by 3%, and strengthened gross cash flow to total debt to 63% from 52%. Further improvement is expected because of demand growth for both traditional and enhanced service offerings, improved productivity as a result of investment in network and operating support systems, and the consolidation of some processes and operations.
However, challenges to the core wireline business are increasing. Competition is expanding rapidly as rivals capitalize on the opportunities presented by an attractive service territory and by the provisions of the Telecommunications Act of 1996. Robust demand growth is pressuring network operating margins and may result in higher-than-anticipated capital spending for increased capacity. Service quality at New York Telephone, which will represent 30% of the domestic telephone investment, also remains a concern.
Bell Atlantic's operational and financial policies have recognized the increasing risk of the core telephony businesses and have demonstrated a commitment to sustain strong financial flexibility -- a commitment that Moody's expects will be continued for the expanded enterprise. Non-core investments have been sold and debt balances have been significantly reduced. Capital allocation has become much more efficient and is increasingly driven by strategic considerations. BAC has scaled back its video plans, a previous source of credit quality concern, and is pursuing, at a moderate pace, entry into the video services business. The company's dividend payout ratio has also declined.
Wireless revenues are expected to continue growing at a robust clip as penetration rates increase. Over the last two years, the cellular businesses of BAC and NYNEX, operated as a joint venture since the third quarter of 1995, have seen revenues increase 45% and subscribers grow 90%. Margins will be pressured, and market share will decline with expanding competition. Nevertheless, the high operating leverage inherent in the business should lead to steady growth in earnings and cash flow over the next several years as penetration increases.
Moody's believes that the merged company's international investments will become more focused over time. Currently, international operations are dominated by wireline and wireless telephony services in Europe (predominantly the UK, Italy and the Czech Republic), Mexico and Asia (predominantly Thailand and Indonesia). The company's international diversification efforts represent an average 16% of assets. Most of these operations, with the exception of an investment in Telecom New Zealand (rated Aa1 for foreign currency denominated long-term obligations), are in the developmental stages. Although the company seeks to leverage its core competencies in telephony, these activities entail a significant degree of operational and financial risk. Alliances with national partners should mitigate some of this risk.
Bell Atlantic Corporation and NYNEX Corporation are international providers of wireline and wireless communications services and are headquartered in Philadelphia, PA and New York, NY, respectively. The new Bell Atlantic will be headquartered in New York City.
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