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Rating Action:

MOODY'S LOWERS LONG TERM DEBT RATINGS OF SBC AND BELLSOUTH TO A2, AND CINGULAR TO Baa2; CONFIRMS Baa2 LONG TERM DEBT RATING OF AT&T WIRELESS; OUTLOOKS FOR SBC AND BELLSOUTH ARE NEGATIVE; OUTLOOKS FOR CINGULAR AND AT&T WIRELESS ARE STABLE

26 Oct 2004
MOODY'S LOWERS LONG TERM DEBT RATINGS OF SBC AND BELLSOUTH TO A2, AND CINGULAR TO Baa2; CONFIRMS Baa2 LONG TERM DEBT RATING OF AT&T WIRELESS; OUTLOOKS FOR SBC AND BELLSOUTH ARE NEGATIVE; OUTLOOKS FOR CINGULAR AND AT&T WIRELESS ARE STABLE

Approximately $47 Billion of Debt Securities Affected

New York, October 26, 2004 -- Moody's Investors Service downgraded the senior unsecured long-term debt ratings of SBC Communications, Inc ("SBC") and BellSouth Corporation ("BellSouth") to A2 from A1 and concurrently lowered the long-term debt ratings of all SBC and BellSouth subsidiaries to A2. Moody's also lowered the long-term debt rating of Cingular Wireless, LLC ("Cingular") to Baa2 from A3, and confirmed the long-term debt rating of AT&T Wireless Services, Inc. ("AT&T Wireless") at Baa2. Moody's also confirmed the Prime-1 short-term debt ratings of SBC and BellSouth, and withdrew the short-term debt ratings of Cingular and AT&T Wireless. The ratings outlook for SBC and BellSouth is negative. The ratings outlook for Cingular and AT&T Wireless is stable. This action concludes the review initiated on February 17, 2004.

The downgrade of SBC's and BellSouth's ratings reflect the loss of financial flexibility and deterioration of credit protection measurements stemming from significantly increased debt levels associated with their joint acquisition of AT&T Wireless. Moody's believes that leverage at both SBC and BellSouth will remain quite elevated for an extended period of time as rapidly developing competition from cable companies and ongoing technology substitution continue to erode the profitability and free cash flow generating capacity of both companies' traditional wireline operations. In addition, increasing capital expenditures associated with network upgrades (mainly pushing fiber closer to the customer in anticipation of deploying video and higher-speed data offerings) will negatively impact free cash flow generation and the companies' ability to reduce debt, at least over the near-term.

While many of the competitive forces that affect SBC and BellSouth are similar, Moody's recognizes that BellSouth's wireline operations are performing quite well relative to the rest of the industry. BellSouth Telecommunications, the company's wireline subsidiary, has had, over the last several years, the highest revenues, operating margins, and free cash flow per access line despite investing the largest amount of capital in its network. SBC, however, retains significant investments outside the USA, which Moody's believes to be non-strategic assets that could be sold to strengthen its balance sheet.

Moody's concurrently lowered the long-term debt ratings of all SBC's wireline and financing conduit subsidiaries and the debt ratings of BellSouth's financing conduits one-notch (to A2). Debt ratings of these subsidiaries reflect unconditional guarantees by their respective parent companies. Moody's also lowered the long-term debt ratings of BellSouth Telecommunications' two--notches (to A2). The two-notch downgrade reflects limited availability of stand-alone financial information for BellSouth Telecommunications and consequently its rating is now based on the unconditional guarantee of its A2 rated parent.

The negative ratings outlooks for SBC and BellSouth, and their respective subsidiaries, are based upon Moody's concern that: 1) significant and expanding competitive challenges to both companies' wireline operations may erode the ability of SBC and BellSouth to reduce debt levels as planned and, 2) integration of AT&T Wireless into Cingular may prove more difficult, expensive and time consuming than expected, and when coupled with the service requirements associated with Cingular's assumption of AT&T Wireless' debt, will lead to lower earnings and distributions to SBC and BellSouth than currently anticipated by the companies.

The ratings of either SBC or BellSouth could be downgraded in the event that intensified competition results in a decline of wireline revenues that exceeds 2% annually or access line losses greater than 5% annually; a more expensive and less successful wireline network upgrade than budgeted, or GAAP net debt levels at SBC and BellSouth above $21 billion and $16 billion, respectively at year-end 2005. The rating outlooks of SBC and BellSouth could stabilize if the decline in wireline revenues is slower than anticipated and, when coupled with the expected growth of wireless profitability, allow either company to reduce debt considerable more than noted above.

Moody's downgraded the ratings of Cingular two-notches to Baa2 to reflect the significant increase in execution risk and external debt balances resulting from Cingular's acquisition of AT&T Wireless and its assumption of about $10 billion of AT&T Wireless' debt. Moody's confirmed AT&T Wireless's long-term debt ratings at Baa2, based on Cingular's assumption of this debt. The magnitude of the integration challenge coupled with recent operating weakness at both wireless entities (but especially at AT&T Wireless) suggests that earnings, cash flows and credit metrics of the newly merged entity will be volatile, at least for the next 18 to 24 months.

Moody's notes that both SBC and BellSouth account for their ownership in Cingular as an investment so that Cingular's external debt is not reflected on their respective balance sheets. At closing, Cingular will have external debt of approximately $13 billion ($3 billion Cingular and $10 billion of assumed A&T Wireless debt). Cingular will also owe $10 billion to SBC ($6 billion) and BellSouth ($4 billion) in the form of shareholder loans that will be subordinated, in all respects, to Cingular's external debt. Moody's rating incorporates the view that SBC and BellSouth regard Cingular as a high priority strategic asset, a fact demonstrated by the parents' liquidity arrangement with Cingular. Moody's also believes that the wireless operations of Cingular are strategically important to both SBC and BellSouth. The strategic importance of Cingular to both SBC and BellSouth together with the parental funding of the AT&T Wireless transaction indicates a higher likelihood of parental support, if needed, in the future.

The stable ratings outlook of Cingular's ratings reflects Moody's belief that Cingular's size and scale after the acquisition will significantly enhance its competitive position. If as a result of the transaction, Cingular can grow its subscriber base at a rate of greater than 5%, sustain a free cash flow to debt ratio of greater than 20% after reasonable capital expenditures, and realize the anticipated synergies, its ratings could improve. Conversely, Cingular's ratings could fall if it experiences a sustained loss in subscribers, if meaningful cost savings fail to materialize and EBITDA margins do not rebound to levels consistent with market leaders, or if the ratio of free cash flow-to-debt falls below 10%.

The complete list of rating actions follows:

SBC Communications Inc.

Senior unsecured long-term debt rating downgrade to A2 from A1

Prospective LT shelf rating downgraded to (P)A2 from (P)A1

Prospective LT preferred shelf rating downgraded to (P)Baa1 from (P)A3

Issuer rating downgraded to A2 from A1

Senior Unsecured short-term debt rating P-1 confirmed

SBC International, Inc

Extended commercial note P-1 confirmed

SBC Communications Capital Corporation

Senior unsecured long-term debt rating downgrade to A2 from A1

Issuer rating downgraded to A2 from A1

Ameritech Capital Funding Corporation

Senior unsecured long-term debt rating downgrade to A2 from A1

Issuer rating downgraded to A2 from A1

Ameritech Credit Corporation

Senior unsecured long-term debt rating assigned A2

Illinois Bell Telephone Co.

Senior unsecured long-term debt rating downgrade to A2 from A1

Indiana Bell Telephone Company, Inc.

Senior unsecured long-term debt rating downgrade to A2 from A1

Michigan Bell Telephone Co.

Senior unsecured long-term debt rating downgrade to A2 from A1

Pacific Bell

Senior unsecured long-term debt rating downgrade to A2 from A1

Wisconsin Bell, Inc.

Senior unsecured long-term debt rating downgrade to A2 from A1

Southern New England Telephone Co.

Senior unsecured long-term debt rating downgrade to A2 from A1

Southern New England Telecommunications Corp.

Senior unsecured long-term debt rating downgrade to A2 from A1

Southwestern Bell Telephone Company

Senior unsecured long-term debt rating downgrade to A2 from A1

BellSouth Corporation

Senior unsecured long-term debt rating downgrade to A2 from A1

Prospective LT shelf rating downgraded to (P)A2 from (P)A1

Issuer rating downgraded to A2 from A1

Senior Unsecured short-term Debt Rating P-1 confirmed

BellSouth Capital Funding Corporation

Senior unsecured long-term debt rating downgraded to A2 from A1

Prospective LT shelf rating downgraded to (P)A2 from (P)A1

Issuer rating downgraded to A2 from A1

BellSouth Telecommunications, Inc.

Senior unsecured long-term debt rating downgraded to A2 from Aa3

Prospective LT shelf rating downgraded to (P)A2 from (P)Aa3

South Central Bell Telephone Company

Senior unsecured long-term debt downgraded to A2 from Aa3

Southern Bell Telephone & Telegraph Company

Senior unsecured long-term debt downgraded to A2 from Aa3

Cingular Wireless, LLC Senior:

Senior unsecured long-term debt rating to Baa2 from A3

Senior unsecured short-term debt rating withdrawn

AT&T Wireless Services:

Senior unsecured long-term debt rating confirmed at Baa2

Senior unsecured short-term debt rating withdrawn

Prospective LT shelf rating withdrawn

Issuer rating withdrawn

TeleCorp Wireless, Inc -- Senior sub. LT debt rating confirmed at Baa2

Tritel PCS, Inc -- Senior sub. LT debt rating confirmed at Baa2

SBC Communications is a regional Bell operating carrier, headquartered in San Antonio, Texas. BellSouth Corporation is a regional Bell operating carrier, headquartered in Atlanta, Georgia. Cingular, now the nation's largest wireless company, is a joint-venture owned 60% by SBC and 40% by BellSouth, and is headquartered in Atlanta, GA.

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

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

No Related Data.
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