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Rating Action:

MOODY'S DOWNGRADES DEBT RATINGS OF COMCAST CABLE COMMUNICATIONS, INC., AT&T BROADBAND LLC, AND MEDIAONE DELAWARE, INC. TO Baa3 FROM Baa2 (SR. UNSEC.); COMCAST CABLE COMMUNICATIONS, INC.'S SHORT-TERM RATING CUT TO PRIME-3 FROM PRIME-2; COMCAST CORPORATION'

30 Sep 2002
MOODY'S DOWNGRADES DEBT RATINGS OF COMCAST CABLE COMMUNICATIONS, INC., AT&T BROADBAND LLC, AND MEDIAONE DELAWARE, INC. TO Baa3 FROM Baa2 (SR. UNSEC.); COMCAST CABLE COMMUNICATIONS, INC.'S SHORT-TERM RATING CUT TO PRIME-3 FROM PRIME-2; COMCAST CORPORATION'

Approximately $40 Billion of Debt Securities Affected.

New York, September 30, 2002 -- Moody's Investors Service has downgraded the long-term senior unsecured debt ratings of Comcast Cable Communications, along with AT&T Broadband's subsidiaries, MediaOne Delaware Inc. and AT&T Broadband LLC to Baa3 from Baa2, as well as Comcast Corporation to Ba1 from Baa3. Also Moody's assigned a Baa3 long-term senior unsecured rating to AT&T Comcast Corporation's new $12.8 billion bank facilities. Comcast Cable Communications' short-term rating has been downgraded to Prime-3 from Prime-2. MediaOne Group, Inc.'s debt, rated Baa3 (senior unsecured) has been confirmed. The rating actions conclude the review initiated on July 9, 2001 and are a result of Comcast's and AT&T's agreement to combine their cable TV system operations (AT&T Broadband) via a tax free merger, which is expected to close in the fourth quarter. The outlook for all the ratings is stable.

The rating action is based on Moody's view that Comcast faces a significant challenge in integrating a cable MSO (multiple system operator) that is over one-and-one-half times its own size, has been experiencing significant subscriber erosion, has the lowest margins in the industry, and requires significant network upgrade. But the rating action also considers the strength of Comcast's management and their historical track record in successfully integrating much smaller, cable system acquisitions and swaps. Management plans to spend one-and-one-third times depreciation at AT&T Broadband, including nearly $2 billion over two years to complete the plant upgrade. At Comcast, capex is expected to run at about the level of depreciation. Deleveraging by debt reduction, other than for the mitigation of the significant capex spending, would be significant as a result of anticipated $4.5 to $5 billion of asset sales in the first two years. At the outset of the merger, there will be slightly more debt than revenues. Once the AT&T systems are upgraded, the cash spent on extraordinary enhancements to plant should be available to reduce debt. The new rating level anticipates a steady reduction in leverage over the medium-term, as it integrates AT&T's systems with Comcast management and best practices to quickly, steadily, and materially grow free cashflow (EBITDA minus: interest, taxes, capex and working capital) which is the basis for the stable outlook.

The AT&T Comcast merger will consist of a tax-free spin off of AT&T Broadband to AT&T shareholders and simultaneous merger with Comcast to form AT&T Comcast Corporation. The new company will own both companies' cable TV systems, an interest in several cable TV joint ventures and its expected 21% residual stake in a restructured Time Warner Cable, Inc. (proforma for the ownership restructuring agreement with AOL Time Warner, in which AOL Time Warner will pay Comcast $3.6 billion in cash and AOL Time Warner stock). In addition, the company will own Comcast's interests in QVC, E! Entertainment, The Golf Channel, and other sports and entertainment properties.

The combined AT&T Comcast Corporation, with in excess of 21 million cable subscribers, will be the largest provider of broadband video, voice and data services in the world, with cable operating clusters in 17 of the 20 largest U.S. markets. Moody's expects 2003 pro forma revenues of more than $24 billion and EBITDA of more than $7 billion. The industry has changed from one that was largely monopolistic to one that now competes against direct broadcast satellite television providers for the core video product, and the regional bells for high-speed-data and local telephony. Competition prompted most MSOs to upgrade the cable plant and manage both the existing video subscriber base and new product launches aggressively. Comcast has prospered and even significantly improved its credit profile in this environment. However, the AT&T Broadband cable systems, which have had multiple owners over the past ten-years, have faltered with regard to their upgrade status vs. Comcast, and how they have been managed relative to most of the U.S. cable industry. The consequence has been a disproportionate level of subscriber defections and weakening penetration levels. Moody's believes that the very weak operating margins have been caused by an inadequate product and customer service focus, failing subscriber retention strategies and bloated cost structure. Moody's believes that the turn around will be a two to three year undertaking. While we expect Comcast to achieve substantial cost reductions and product focus, improved reputations in the cable industry generally lag improved performance.

Moody's anticipates that completing the rebuild of the AT&T Broadband systems will be a high priority, and will be substantially completed by year-end 2004. The cost to complete the rebuild will likely approach $2 billion. After 2004, we anticipate that total capex will decline and the residual capex levels will become increasingly tied to new product sales, and therefore decline as a percentage of revenues and EBITDA. Moody's believes that the result of these factors will be a steady increase in free cashflow, which will be used to reduce absolute debt levels and leverage over the intermediate-term.

The new company will assume more than $30 billion in debt and exchangeable notes and liabilities from AT&T, which includes $5 billion of AT&T subsidiary trust convertible preferred securities ("QUIPS") held by Microsoft Corporation and more than $7 billion in exchangeable notes. The QUIPS are expected to be converted into a nearly 5% equity stake in the new company at the close of the transaction and the $7 billion of exchangeable securities, which were issued to monetize a number of investments in recent years (shares in Cablevision, Comcast Corporation, Microsoft, and Vodafone) in a tax efficient manner, are effectively hedged to protect the company against a decline in the underlying value of the securities, so we only consider the expected tax liability to be debt. However, Moody's views Comcast's $1.8 billion in ZONES, securities exchangeable into Sprint PCS stock, as largely debt (about 80%) since the value of the stock has deteriorated significantly since their issuance and the security has not transferred any risk of the declining security value to the holders of those securities. The net result of the varied equity-like attributions is nearly $20 billion of net debt and liability assumption before any other asset sales or monetizations.

In connection with the merger, AT&T Comcast has already secured $12.8 billion in new bank facilities, including a new $2.6 billion 5-year unsecured revolver, a $3.2 billion two-year term loan and a $7.0 billion bridge facility. The proceeds of the new facilities will be used to help refinance, along with the anticipated bond exchange, existing AT&T Broadband debt. Comcast also rolled over its existing $1.925 billion 364-day revolving credit facility and amended its existing $2.25 billion 5-year revolving credit facility to permit the merger and the new borrowings. There are no material adverse change clauses which would limit the company's ability to access the facilities. There are financial covenants in the bank loan indentures which Moody's believes allow the company flexibility to complete its integration without significant financial pressure.

All obligations of AT&T Comcast will be guaranteed by Comcast Cable Communications, Inc., MediaOne Group, Inc., AT&T Broadband Corporation, AT&T Broadband, LLC and any restricted subsidiary that incurs additional indebtedness above an amount to be determined. In addition, each guarantor will provide and receive cross, upstream, and downstream guarantees from all the other guarantors. These guarantees make the debt at AT&T Comcast, including the new bank facilities, and most of its cable operating companies pari passu with each other and therefore are rated the same. While MediaOne Delaware, Inc. (the former Continental Cablevision), which has $1.8 billion in debt, is not a party to the guarantees, Moody's has placed its ratings even with the other cable operating companies. This is due to its stronger stand-alone credit metrics, common ownership and management and its status as a core asset with some 4.4 million subscribers (over 20% of the company's total subscribers).

With regulatory approval likely, the company has filed a preliminary Form S-4 registration statement regarding $11.76 billion of existing AT&T Corp. debt requiring more than 50% of bondholders consent in order to waive the Merger and Sale of Assets covenant in the 1990 Note Indenture. AT&T Comcast plans to use a series of bond exchanges in order to achieve the consents. Moody's believes that the bond exchange/consent will be successful with the exchanged bonds being used to help offset AT&T Broadband's short-term intercompany debt owed to AT&T Corp. The exchange of the long-term bonds will improve the new company's liquidity profile, as it will effectively term out a substantial portion of short-term debt. Moody's expects the remainder of the company's intercompany debt liability, as well as any potential need to refinance bonds putable according to change of control provisions in some of the AT&T Broadband's bond indentures, will be repaid/refinanced using a portion of its $12.8 billion in new bank facilities and with the approximate $3.6 billion in proceeds expected to be received from AOL Time Warner shortly after the merger. Moody's believes that the company's liquidity profile is sufficient to near the end of 2004, by which time the company will need to have turned the corner sufficiently to produce material free cashflow, realize proceeds from the IPO sale of its remaining 20% interest in Time Warner Cable, or accessed the capital markets to refinance the outstanding expirations, which we believe to be reasonably achievable.

Moody's believes that the proforma credit metrics at the close of the transaction are weak for an investment grade rating. However, with expected sharp improvement in cashflow, and AT&T Broadband system operating margins and debt reduction, meaningful conversion ratio of EBITDA into free cashflow, leverage ratios (debt to EBITDA, debt to EBITDA-CAPEX and FCF/Debt) improve significantly over the next two years. It is also important to note that Comcast maintains a 57% ownership in QVC. QVC has grown its revenues and its operating cash flow by a 20% CAGR since 1996, all while decreasing its leverage ratio to under 1.0x. This also provides the company with some added flexibility.

The rating actions are as follows:

Comcast Corp.

LT Issuer Rating From Baa3 to Ba1

Senior Unsecured Shelf From (P)Baa3 to (P)Ba1

Senior Subordinated From Ba1 to Ba2

Senior Subordinated Shelf From (P)Ba1 to (P)Ba2

Subordinated From Ba1 to Ba2

Subordinated Shelf From (P)Ba1 to (P)Ba2

Preferred shelf From (P)Ba2 (P)Ba3

Comcast Cable Communications, Inc. (also including the former Jones Intercable and Lenfest Communications debt)

Senior Unsecured From Baa2 to Baa3

Senior Unsecured Shelf From (P)Baa2 to (P)Baa3

Subordinated Shelf From (P)Baa3 to (P)Ba1

Short-term (CP)From Prime-2 to Prime-3

AT&T Broadband LLC (formerly TCI Communications Inc.)

Senior Unsecured From Baa2 to Baa3

Subordinated From Baa3 to Ba1

TOPrSFrom Baa3 to Ba1

Jr. Pref.From Ba1 to Ba2

MediaOne Group Inc. (including former US West Capital Funding debt)

Senior Unsecured Baa3 confirmed

MediaOne Funding Inc. (MediaOne Finance Trust III)

TOPrSBaa3 affirmed (guaranteed by AT&T Corp. - negative outlook)

Media One of Delaware (formerly Continental Cablevision)

Senior UnsecuredFrom Baa2 to Baa3

Comcast Corporation, with its headquarters in Philadelphia, Pennsylvania, is one of the nation's largest cable television system operators, owns and operates cable television programming and a major electronic retailer, owns sports teams and arenas and owns other material related but non-core investments.

AT&T Corp. is a leading provider of global telecommunications services and is headquartered in New York City.

New York
Neil P. Begley, CPA
Senior Vice President
Media, Telecom & Technology Grp.
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Konefal
Managing Director
Media, Telecom & Technology Grp.
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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