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Rating Action:

MOODY'S DOWNGRADES SR UNSECURED LONG-TERM RATINGS OF BELLSOUTH TO A1 FROM Aa3; SUBSIDIARY RATINGS LOWERED ONE NOTCH; OUTLOOK STABLE

11 Apr 2003
MOODY'S DOWNGRADES SR UNSECURED LONG-TERM RATINGS OF BELLSOUTH TO A1 FROM Aa3; SUBSIDIARY RATINGS LOWERED ONE NOTCH; OUTLOOK STABLE

Approximately $15.0 Billion of Long-Term Debt Affected

New York, April 11, 2003 -- Moody's Investors Service downgraded the senior unsecured long-term ratings of BellSouth Corporation ("BellSouth") to A1 from Aa3. Moody's also lowered the long-term ratings of BellSouth's subsidiaries by one notch (see list below). The Prime-1 short-term debt rating of BellSouth Corporation was not on review for downgrade and is confirmed. The outlook for all ratings is stable. This action concludes the review begun on September 17, 2002.

The downgrades reflect Moody's belief that: 1) rapidly expanding competition and technology substitution will increasingly erode the strong free cash flow generating capacity of the company's traditional wireline operations; 2) business risk has increased both in BellSouth's local business and also in its data and wireless segments, necessitating a reduction in financial risk; 3) cost containment and capital expenditure reductions undertaken to limit cash flow erosion will become more difficult; and 4) weak economic conditions and regulatory uncertainty will hamper the company's ability to improve operating and financial performance.

The stable outlook acknowledges: 1) the significant progress that BellSouth 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) Moody's expectation that long distance entry will moderate access line loss and help stabilize top line revenue and, 4) Moody's expectations that BellSouth will use a balance of debt and equity should it decide to pursue an acquisition or significant investment that does not materially change business or financial risk. However, Moody's believes that beyond the 12 to 18 months typically incorporated into the ratings outlook, there is considerable uncertainty about the effects that cable telephony, wireless substitution, and competitive use of UNE-P will have on BellSouth's (and the other RBOCs') operating performance.

BellSouth continues to maintain a strong market position, fiscally conservative management, and a profitable base of largely unencumbered assets. BellSouth's portfolio of businesses include its local wireline, long distance, high-speed (including DSL), and wireless services, its investments in international operations (mainly Latin American wireless properties), and its highly profitable publishing business.

The domestic local telephone operations, by far BellSouth'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 erosion. The company has been able to offset some of this pressure with deep capital spending cuts (37%, $2.2 billion, year over year), improvements in operational efficiency, new product introductions and marketing initiatives. BellSouth's ability to offer in-region long distance throughout its service territory (it was the first RBOC to obtain full authorization throughout its territory) improves its competitive position through the ability to offer a bundled product set.

Moody's projects that BellSouth's wireline operations will generate about $3 billion in cash flow less capital expenditures this year, most of which will be distributed to the parent company as dividends. Moody's believes that there is only very limited potential for further significant cuts in capital spending because of competitive challenges, demand for broadband services and network maintenance requirements. Expense reduction should continue although future gains are likely to be less robust given the increasingly challenging competitive environment. Consequently, Moody's anticipates that free cash flow generated from this segment may decline over time. The domestic wireline subsidiaries contain about half of BellSouth's $17 billion of gross debt. Moody's expects BellSouth's wireline subsidiary, BellSouth Telecommunications, to dividend substantially all available free cash flow, net of servicing its own obligations, to the parent company to help service the parent company debt.

Wireless, broadband and long distance data all represent growth opportunities that could substantially offset slow or negative access line growth, but these businesses require substantial up front and ongoing investment. As time passes, Moody's believes that BellSouth's asset base will become more weighted toward these highly competitive assets versus once stable local access lines heightening the level of business risk. While the outcome of the FCC's recent triennial review maintains the status quo on certain negative elements for BellSouth, increased long distance penetration should begin to moderate access line loss.

Moody's notes BellSouth's wireless operations are accounted for off balance sheet in its Cingular joint venture with SBC. While Cingular has relatively modest external debt (senior unsecured A3 negative outlook), Moody's believes that BellSouth and SBC regard Cingular as a high priority strategic asset, and would provide capital support to Cingular, if necessary, to enhance its competitive profile and preserve the strength of Cingular's balance sheet.

Moody's expects the directory business to remain very profitable and to significantly contribute to cash flow (last year it generated about $550 million in free cash flow on a little over $2 billion in revenues) as the company responds successfully to competitive challenges and further develops its electronic distribution products.

BellSouth is generating free cash flow and deleveraging by aggressively cutting operating expenses, controlling capital expenditures, monetizing non-strategic assets, restricting additional international investment and limiting share repurchases. As a result of these efforts, at year end 2003, net debt balances could be about 40% lower than they were at year-end 2001 levels if the company performs to its plan, with maturing long term debt paid down with free cash flow and cash on hand. Dec. 31, 2002 net debt levels were 25% lower than levels on Dec. 31, 2001. Manageable commercial paper balances, significant cash balances, still strong cash flow from operations, and undrawn and strengthened credit lines provide BellSouth with significant liquidity. During 2002, BellSouth reduced its commercial paper balances about 25% from over $2.5B billion to about $1.9B. The company is also in the process of converting its bilateral agreements to a single $1.5B syndicated credit agreement and is committed to maintaining 100% backup of its CP program.

While Moody's is concerned about the long-term pressures on BellSouth's businesses, the rating agency emphasized that BellSouth continues to maintain a strong market position, a profitable base of largely unencumbered assets and fiscally conservative management. The business diversification that exists at BellSouth has helped to insulate the company from the negative pressures in any one particular business segment.

The ratings lowered are:

BellSouth Corporation - issuer rating, to A1 from Aa3.

BellSouth Capital Funding Corporation - senior unsecured, to A1 from Aa3; senior unsecured medium-term notes, to A1 from Aa3; senior unsecured shelf , to (P)A1 from (P)Aa3; and issuer rating, to A1 from Aa3.

BellSouth Savings and Employee Stock Ownership Trust - senior unsecured, to A1 from Aa3

BellSouth Savings and Security ESOP Trust - senior unsecured, to A1 from Aa3

South Central Bell Telephone Company - senior unsecured, to Aa3 from Aa2

Southern Bell Telephone & Telegraph Company - senior unsecured, to Aa3 from Aa2

BellSouth Telecommunications, Inc. - senior unsecured, to Aa3 from Aa2; senior unsecured shelf, to (P) Aa3 from (P)Aa2; reset put securities, to Aa3 from Aa2.

BellSouth Corporation is a global telecommunications provider and is headquartered in Atlanta, Georgia.

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

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

No Related Data.
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