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
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
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:
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
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.
Neil P. Begley, CPA
Senior Vice President
Media, Telecom & Technology Grp.
Moody's Investors Service
Media, Telecom & Technology Grp.
Moody's Investors Service