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Rating Action:

MOODY'S DOWNGRADES LONG-TERM DEBT RATINGS OF VERIZON, VERIZON WIRELESS AND VERIZON'S DOMESTIC TELECOM SUBSIDIARIES BY ONE NOTCH (VERIZON COMMUNICATIONS TO A2 FROM A1). SHORT-TERM DEBT RATINGS ARE CONFIRMED. THE OUTLOOK FOR ALL RATINGS IS STABLE.

18 Dec 2002
MOODY'S DOWNGRADES LONG-TERM DEBT RATINGS OF VERIZON, VERIZON WIRELESS AND VERIZON'S DOMESTIC TELECOM SUBSIDIARIES BY ONE NOTCH (VERIZON COMMUNICATIONS TO A2 FROM A1). SHORT-TERM DEBT RATINGS ARE CONFIRMED. THE OUTLOOK FOR ALL RATINGS IS STABLE.

APPROXIMATELY $57 BILLION IN DEBT AFFECTED

New York, December 18, 2002 -- Moody's Investors Service downgraded the senior unsecured long-term debt ratings of Verizon Communications to A2 from A1. The long-term debt ratings of the company's 55% owned subsidiary, Verizon Wireless has been downgraded to A3 from A2 and the ratings of each of Verizon's domestic wireline subsidiaries have also been downgraded by one notch (see list below). The Prime-1 short-term debt ratings of Verizon Global Funding and Verizon Network Funding were not on review for downgrade and are confirmed. The outlook for all ratings has been changed from negative to stable.

The downgrades reflect Moody's concerns that: 1) the effects of rapidly expanding competition and technology substitution may increasingly erode the strong free cash flow generating capacity of the company's traditional wireline operations; 2) Verizon Wireless, despite serving as a partial hedge against the effects from wireless substitution, may be unable to grow cash flows fast enough to offset the declines in the wireline business because it faces an extremely competitive landscape for providing national wireless voice and data services; and, 3) consequently, the company's ability to sustain cash flow, net of substantial capital expenditures and dividends, relative to the company's still large (but much reduced) debt load will be challenged.

The stable outlook acknowledges: 1) the significant progress that Verizon has made in deleveraging its balance sheet and improving its liquidity profile; 2) its commitment to further debt reduction in the face of increasing business risk; 3) the dismissal of the $8.8 billion purchase obligation associated with the NextWave re-auction; and, 4) Moody's expectation that Verizon would fund the Vodafone put, (should Vodafone exercise its put option in VZ Wireless) or a significant acquisition or investment in a manner that preserves balance sheet strength.

While the company's decision not to re-integrate the operations of Genuity eliminates the near-term impact on Verizon's balance sheet and financial flexibility from the further funding of Genuity's operations or a decision to reintegrate it, Moody's is concerned that the company could face contingent obligations associated with its disengagement from Genuity and will still need to make the necessary investments to compete effectively in the $100 billion enterprise market.

The domestic local telephone operations, by far Verizon's largest and most profitable asset, (and the source of most of its free cash flow) are being negatively impacted by rapidly increasing competitive challenges from IXCs, CLECS, wireless providers, technology substitution (e.g. instant messaging, email) and cable companies as evidenced by line losses and revenue weakness. Verizon has been able to offset some of this pressure with deep capital spending cuts (35%, $4 billion, year over year), improvements in operational efficiency, new product introductions and successful marketing initiatives. Verizon's ability to offer in-region long distance to over 90% of its customers enhances its competitive position through the ability to offer a bundled product set.

Moody's projects that Verizon's wireline operations will generate about $6 billion in cash flow less capital expenditures this year (up from about $3 billion in 2001) most of which will be distributed to the parent company as dividends. However, Moody's believes that capital spending is likely to trend upward, over time, in response to the growing competitive challenges, demand for broadband services and network upgrades. Consequently, Moody's anticipates that free cash flow generated from this segment may decline over time. The domestic wireline subsidiaries contain a little over half of VZ's $52 billion of net debt.

Verizon Wireless, by far the largest wireless provider in the U.S. and 55% owned by Verizon, is arguably the best positioned of the six domestic wireless carriers. Its cost structure and churn rates are the lowest in the industry. Its network is based on the most efficient and economical digital standard, CDMA. (Moody's believes that the network upgrade path necessary for offering third generation ("3G") wireless services will be easiest and least costly for CDMA providers compared to GSM and TDMA because of lower spectrum requirements and favorable migration paths. As an added benefit, the intermediate upgrade to 2.5G (1XRTT) doubles voice capacity for a relatively modest investment that Moody's estimates at between $3 and $5 per POP).

The largest national network footprint, covering 80% of the population, minimizes roaming costs, which is important given the popularity of national service offerings. In addition, excellent distribution channels including a high percentage of low cost direct distribution, improving operating efficiencies and strong purchasing power are expected to allow the company to sustain its industry leading position and performance. However, the competitive environment and expectations of lower future growth rates are a source of industry concern.

Recent announcements from several carriers has caused Moody's to be concerned that the wireless market may already be more mature than expected and that what could previously have been interpreted as a cyclical slowdown of growth is now more secular in nature. This decelerating growth comes at a time when carriers are investing heavily to upgrade their networks. To date, carriers have not competed primarily on price. Instead, they drove subscriber growth by expanding their service offering, with such offers as free long distance, no roaming charges, and larger buckets of minutes included in the monthly plans. Increased price competition could exacerbate pressures on cash flows caused by high subscriber acquisition costs, and significant capital requirements both to provide sufficient network capacity to accommodate the tremendous amount of minutes being used and to update technology platforms is likely to restrict growth in FCF. Therefore, despite the spectrum efficiencies of CDMA and its robust spectrum portfolio we believe that VZ Wireless will need to obtain additional spectrum in several of its larger markets. While Moody's believes that VZW will generate free cash flow net of distributions to Verizon and Vodafone of about $1 billion this year, we are becoming increasingly convinced that its cash flows will not grow as quickly as originally anticipated and that spectrum costs will put pressure on cash flows near-term.

Moody's expects the directory business to remain very profitable and to significantly contribute to cash flow (last year it generated about $1.25 billion in free cash flow on a little over $4 billion in revenues) as the company responds successfully to competitive challenges and expands into electronic distribution.

Verizon has strengthened its balance sheet and improved its liquidity profile over the last nine months. Moody's notes that during the first nine months of this year Verizon has reduced net debt by $11.5 billion and outstanding commercial paper by about $9.3 billion (to $3.5 billion). However, the bulk of the debt reduction was accomplished through reducing capital expenditures (about $4.4 billion reduction), asset sales proceeds (about $5.5 billion) and the refund of $1.8 billion from the dismissed NextWave re-auction. Moody's believes that Verizon's future capital expenditures will be somewhat higher than 2002 levels (estimated at about $12.5 billion) as it steps up investment in broadband, data and enterprise initiatives in response to recovering demand and increasing competition.

Moody's anticipates that Verizon's commercial paper balances will, at most, approach $5 billion (VZ maintains a $7 billion 364 day facility with a one-year term out to backstop commercial paper) and that the company will continue to utilize its free cash flow and the proceeds from some additional non-core asset sales to further reduce debt.

Verizon Communications provides domestic and international wireline and wireless communications services and is headquartered in New York, NY.

Verizon Global Funding Corp.

Issuer Rating, to A2 from A1

Senior Unsecured, to A2 from A1

Verizon Wireless Capital LLC

Senior Unsecured, to A3 from A2

NYNEX Corporation

Long-Term Debt, to A3 from A2

GTE Corporation

Long-Term Debt, to A3 from A2

Verizon Corp. Savings Plan Trust

Guaranteed ESOP notes, to A3 from A2

Verizon Capital Corporation

Medium-term notes, to A3 from A2

Verizon New Zealand Holdings, Inc.

Preferred stock, to Baa1 from A3

Prefco IX Limited Partnership

Secured notes, to A2 from A1

Verizon New Jersey, Inc.

Debentures, to Aa3 from Aa2; shelf registration of debt securities, to (P) Aa3 from (P)Aa2

Verizon Pennsylvania, Inc.

Debentures, to Aa3 from Aa2; shelf registration of debt securities, to (P)Aa3 from (P)Aa2

Verizon West Virginia, Inc.

Debentures, to Aa3 from Aa2; shelf registration of debt securities, to (P)Aa3 from (P)Aa2

Verizon Maryland, Inc.

Debentures, to Aa3 from Aa2; shelf registration of debt securities, to (P)Aa3 from (P)Aa2

Verizon Washington, D.C., Inc.

Debentures, to Aa3 from Aa2; shelf registration of debt securities, to (P)Aa3 from (P)Aa2

Verizon Virginia, Inc.

Debentures and notes, to Aa3 from Aa2; shelf registration of debt securities, to (P)Aa3 from (P)Aa2

Verizon Delaware, Inc.

Debentures, to Aa3 from Aa2

Verizon New England, Inc.

Notes and debentures, to Aa3 from Aa2; shelf registration of debt securities, to (P) Aa3 from (P)Aa2

Verizon North, Inc.

First mortgage bonds, to Aa3 from Aa2; debentures, to A1 from Aa3 ; shelf registration of debt securities, to (P) A1 from (P)Aa3 ; Telephone Facility Lease Bonds, to A1 from Aa3.

Verizon Northwest, Inc.

Debentures, to A1 from Aa3; shelf registration of debt securities, to (P)A1 from (P)Aa3

Verizon California, Inc.

Debentures, to A1 from Aa3

Verizon Hawaiian Telephone Company, Inc.

First mortgage bonds, to A3 from A2; debentures, to Baa1 from A3.

GTE Southwest, Incorporated

First mortgage bonds, to Aa3 from Aa2; notes and debentures, to A1 from Aa3; shelf registration of debt securities, to (P) A1 from (P)Aa3

Verizon South, Inc.

Debentures, to A1 from Aa3

Verizon Florida, Inc.

Debentures, to A1 from Aa3; shelf registration of debt securities, to (P) A1 from (P)Aa3

Verizon New York, Inc.

First mortgage bonds, to A1 from Aa3; notes and debentures, to A2 from A1; shelf registration of debt securities, to (P)A2 from(P)A1

New York
Robert Konefal
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Dennis Saputo
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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