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Rating Action:

MOODY'S DOWNGRADES LONG TERM RATINGS OF AT&T (SENIOR UNSECURED TO A1 FROM Aa3) AND UPGRADES RATINGS OF TELE-COMMUNICATIONS INC. AND SUBSIDIARIES (SENIOR UNSECURED TO A2 FROM Baa3)

09 Feb 1999
MOODY'S DOWNGRADES LONG TERM RATINGS OF AT&T (SENIOR UNSECURED TO A1 FROM Aa3) AND UPGRADES RATINGS OF TELE-COMMUNICATIONS INC. AND SUBSIDIARIES (SENIOR UNSECURED TO A2 FROM Baa3) Moody's Investors Service has downgraded its long term ratings on the debt and preferred stock of AT&T (senior unsecured to A1 from Aa3), has assigned a (P)A1 rating to AT&T's recently filed shelf registration and has upgraded the debt and preferred stock of Tele-Communications Inc. (TCI) and its subsidiaries (senior unsecured to A2 from Baa3). The rating actions conclude a review initiated on June 26, 1998 following the announcement of a proposed acquisition of TCI by AT&T in an exchange of common stock which is expected to close in the near future. AT&T's Prime-1 short term rating was not on review and is confirmed. The outlook for the revised ratings is stable. TCI Communications' Prime-3 short term rating is expected to be withdrawn following the closing and repayment of any outstanding commercial paper. The B3 rating on subordinated debt of Tele-Communications International, which will be part of the Liberty Media Group, remains on review for possible upgrade, pending an assessment of the strategic direction and credit quality of Liberty Media.

The downgrade of AT&T reflects the execution challenges facing the company as it attacks new market opportunities, the sizable capital spending required to achieve its strategic goals, the significant increase in debt that will result from this acquisition and a competitive environment that is increasing in intensity for each of its service offerings. The rating also considers the significant cash generating capability of the combined enterprise, strategic clarity embedded by its use of cable networks for access to the "last mile", the strong competitive positions of its long distance, wireless and video units, the success of management in re-invigorating AT&T and achieving targets they have put forth, and the use of equity in its acquisitions. The upgrade of the TCI ratings is based on its significant financial, operational and managerial integration with AT&T's core consumer telephone business. However, the TCI debt will not be guaranteed nor directly supported by AT&T. Future capital requirements for TCI are expected to be provided internally.

Ratings downgraded:

AT&T Corp.

Senior unsecured to A1 from Aa3

TCI Communications

Senior unsecured to A2 from Baa3

Subordinated to A3 from Ba2

Preferred stock to "a3" from "ba2"

Tele-Communications Inc.

Senior shelf to (P)A2 from (P)Ba1

Subordinated shelf to (P)A3 from (P)Ba3

Preferred shelf to (P)"a3" from (P)"ba2"

TCI Pacific Communications

Preferred stock to "baa1" from "b1"

TCI TKR Cable I Inc.

Subordinated to Baa1 from Ba3



Following the pending transactions, AT&T's consolidated debt load will increase to more than $30 billion. While the company generates significant cash flow, it also faces sizable capital spending requirements to implement its local telephony strategy, including upgrading TCI's cable properties, as well as the ongoing needs of its other core businesses. In addition, Moody's expects the company to identify other strategic investment opportunities in the future, which could limit debt reduction. While AT&T will repurchase nearly $10 billion of its common stock during 1998 and 1999 as part of its financial restructuring, future purchases are expected to be modest.

The acquisition of TCI is a key part of AT&T's strategy to enter the local telephony market by using the existing cable networks. AT&T has indicated its intention to have access to at least two thirds of the U.S. households within the next several years and has begun arranging partnerships with cable industry participants, with nearly 40% coverage achieved already. Implementation will require upgrading cable bandwidth, adding two way capacity, and providing interface equipment at the individual house. At TCI's owned facilities, all of these expenditures will be funded by AT&T. The use of partnerships in other geographic regions provides the opportunity to share capital investment. While the technology exists for the deployment, there remain significant implementation risks due to the magnitude and timing of the roll out.

Management has established a commendable track record in meeting its commitments, such as the 1998 cost reduction program, and refocusing and motivating a large, bureaucratic organization. However, there are a number of initiatives underway at the same time, including the entry into local telephony, the completion of its national wireless footprint and pricing strategy and an international joint venture with British Telecom. At the same time, it is preparing for the ultimate entry of competition by the RBOCs in the long distance market. Its bundled pricing strategy relies on the successful implementation of a variety of initiatives, which will be a complex undertaking.

The complex legal structure regarding the Liberty Media assets has the effect of creating a de facto separation from AT&T. There will be a separate class of AT&T stock which targets the Liberty Media operations. Management decisions will be made by a separate board not controlled by AT&T, any cash flowing out of Liberty to AT&T must be dividended to Liberty Media target stock holders and the proceeds from the sale of Liberty or its assets are for the account of the Liberty holders. Therefore, Liberty Media is not a meaningful factor in the AT&T and TCI ratings.

AT&T Corp. is a leading provider of global telecommunications services and is headquartered in Basking Ridge, New Jersey. TCI Communications, Inc., headquartered in Englewood, Colorado, is one of the largest U.S. operators of cable television systems.


No Related Data.
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