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Rating Action:

MOODY'S PLACES VERIZON'S RATINGS (PARENT AT A2, PRIME-1) ON REVIEW FOR POSSIBLE DOWNGRADE; MCI'S LONG-TERM RATING (SENIOR AT B2) ON REVIEW FOR POSSIBLE UPGRADE

14 Feb 2005
MOODY'S PLACES VERIZON'S RATINGS (PARENT AT A2, PRIME-1) ON REVIEW FOR POSSIBLE DOWNGRADE; MCI'S LONG-TERM RATING (SENIOR AT B2) ON REVIEW FOR POSSIBLE UPGRADE

Approximately $45 Billion of Debt Securities Affected

New York, February 14, 2005 -- Moody's Investors Service has placed the long- and short-term debt ratings of Verizon Communications Inc. (VZ) and the long-term ratings of its telephone subsidiaries' on review for possible downgrade based on the company's plan to acquire MCI for about $8.9 billion in cash, stock and assumed debt. At the same time, Moody's is affirming the A3 senior rating on Verizon Wireless (VZW) while changing its outlook to stable from positive. In addition, Moody's is placing the long-term ratings of MCI on review for possible upgrade. The complete list of rating actions follows at the end of the press release.

The review for possible downgrade of VZ will focus on our assessment of VZ's plans to generate multi-billion dollar expense reductions and increased revenue in light of MCI's declining revenues and cash flows, and significant investment needs. We will also assess the impact on credit metrics arising from the expected timing and magnitude of anticipated cost synergies relative to the timing and magnitude of expense and investment needed by VZ to achieve these synergies. We note that the transaction contains closing adjustments if contingent liabilities, mainly bankruptcy, state and international tax issues, are outside certain parameters. Moody's recognizes the benefits to VZ of acquiring a stronger position in the enterprise market through the purchase of MCI, and of the benefits to established players of in-market consolidation. However, the review will also consider VZ's strategy with regard to rapid industry consolidation as well as its intentions and ability to continue delevering in the face of consolidation.

At a minimum, Moody's believes the VZ and MCI combination will allow for some expense synergies. While VZ has indicated that the net present value of synergies from this transaction approximate $7 billion, the investment required to achieve these savings is estimated by VZ to total between $3.0 and $3.5 billion during the first three years. If Moody's determines that these synergies will materialize as expected, there is a high likelihood that Verizon's ratings would be confirmed.

The outlook change on VZW reflects our concerns the merger will be a distraction for VZ during a time when the landscape of the telecommunications industry is rapidly changing. However, should VZ's ratings be confirmed and VZW continue to grow earnings and cash flows rapidly while quickly delevering beginning in late 2005, its ratings could be positively impacted.

Moody's review for possible upgrade of MCI's will focus on VZ's plans for MCI's debt upon completion of the merger. While a VZ guarantee of MCI's debt would equalize MCI's and VZ's long-term ratings, Moody's believes unguaranteed MCI debt would still benefit from indirect VZ support. As a result, MCI's rating could potentially rise a couple of notches, even absent a guarantee, while Moody's view of VZ's pro forma business risk will primarily drive VZ's rating.

VZ's current A2 rating reflects the strong performance of Verizon Wireless, substantial cash flows from its core wireline and directories businesses and recent significant deleveraging, offset by the prospect of increasing cable voice over Internet protocol (VOIP) competition. Declining revenues, cash flows, weak free cash flow generation, and a highly competitive enironment drive MCI's current B2 rating offset.

Moody's believes that VZ views the threat to its core wireline cash flow stream from cable competition as significant. Furthermore, Moody's believes the company's decisions to upgrade its networks, enhance and diversify its consumer revenue streams (through long distance, broadband, wireless and video service offerings) and accelerate the development of its enterprise service business is strategically appropriate in light of this threat to the core residential wireline business. Nonetheless, VZ's execution risk is substantial.

Moody's believes the proposed merger is positive for MCI from an operational standpoint. Recent regulatory rulings pertaining to UNE-P pricing have been harmful for MCI's business prospects, especially in the consumer space. While MCI is a well-positioned long haul provider with good customer relationships, Moody's believes the long haul sector remains intensely competitive with companies like AT&T, Qwest, Level 3, and others aggressively pricing capacity and other long distance services.

VZ's bid for MCI signals its desire to be a leading telecommunications company in the United States. Moody's believes that VZ's purchase of MCI will complement its current business activities and establish it as the number two provider in enterprise data services, a potential growth area. While owning MCI's extensive long distance network should reduce VZ's cost structure in relation to its own long distance, broadband and even wireless long haul transport needs, MCI's revenue stream remains in decline.

Ratings placed on review for possible downgrade are:

Verizon Global Funding Corp.: A2 senior unsecured, Prime-1 short-term

Verizon Network Funding: Prime-1 short-term

GTE Corporation: A3 senior unsecured

NYNEX Corporation: A2 senior unsecured

GTE Southwest, Inc.: A1 first mortgage bonds, A2 notes and debentures

Verizon California, Inc.: A1 debentures

Verizon Delaware, Inc.: Aa3 debentures

Verizon Florida, Inc.: A1 debentures

Verizon Maryland, Inc.: Aa3 debentures

Verizon New England: A2 debentures

Verizon New York, Inc.: Baa2 notes and debentures

Verizon North, Inc.: Aa3 first mortgage bonds, A1 debentures

Verizon Northwest, Inc.: A1 debentures

Verizon South, Inc.: A2 debentures

Verizon Virginia, Inc.: Aa3 debentures and notes

Verizon West Virginia, Inc.: Aa3 debentures

Verizon Washington, D.C., Inc: Aa3 debentures

Ratings remaining on review for possible downgrade :

Verizon New Jersey, Inc.: Aa3 debentures

Verizon Pennsylvania, Inc.: Aa3 debentures

Verizon Hawaii, Inc.: Baa1 debentures

The following rating outlook was changed from positive to stable:

Verizon Wireless Capital LLC: A3 senior unsecured

The following MCI ratings were placed on review for possible upgrade:

B2 Senior Implied

B2 Senior Unsecured Rating

B3 Issuer rating

Moody's also affirmed MCI's speculative grade liquidity rating at SGL-1, as near term, MCI's liquidity profile is unchanged.

Verizon Communications is a regional Bell operating carrier, headquartered in New York City. MCI Inc. is a global telecommunications provider headquartered in Ashburn, VA.

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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