New York, December 21, 2010 -- Moody's Investors Service (Moody's) changed its outlook for
the debt ratings of AT&T Inc. ("AT&T") and
its subsidiaries to stable from negative based on the company's
recently improved operating performance, its efforts over the past
two years to reduce its financial leverage, and Moody's expectation
that management will adhere to its stated credit metric targets.
At the same time, Moody's assigned an A2 rating to AT&T's
new $8 billion credit facility and affirmed the company's
A2 senior unsecured long-term and Prime-1 short-term
ratings, along with the A2 ratings of certain rated subsidiaries.
The company's operational improvements led to the resumption of
revenue and EBITDA growth in 2010, which contributed to the deleveraging.
AT&T suspended its stock buyback activity in mid-2008 to conserve
cash and proforma for the expected debt pay down by year-end 2010,
will have repaid about $9 billion of balance sheet debt since the
end of 2008.
"AT&T's ability to restore its leverage to levels consistent
with its A2 rating is a testament to the strength of the company's
business model and the resiliency of its cash-generating capability
amid increasing competitive challenges," said Moody's
Vice President -- Senior Credit Officer Gerald Granovsky.
Although the company has announced that it will reinstitute a stock buyback
program, the absolute reduction in its funded debt and modestly
growing EBITDA will provide sufficient financial flexibility to increase
shareholder returns while maintaining its credit profile within the confines
of the A2 rating. Moody's expects the company's adjusted
Debt/EBITDA leverage to decline to below 2.0 times at year-end
2010 from 2.2 times in 2008.
Granovsky added: "Our analysis shows that the potential loss
of AT&T's exclusive contract for the iPhone, if it occurs,
is not likely to be materially detrimental to its credit profile,
especially if AT&T maintains rational pricing and customer acquisition
policies."
Another hallmark of a solid A2 company is conservative liquidity management.
AT&T has strengthened its liquidity position by entering into a new
$8 billion committed credit facility that consists of a $5
billion four-year revolver and a $3 billion 364-day
revolver with a term-out option. Both credit facilities
also include an extension option. Although the company reduced
the size of the facility from the $9.5 billion backup line
that it is replacing, Moody's does not expect the company
to issue the high levels of commercial paper that it did throughout 2008.
Rating Actions --
..Issuer: AT&T Inc. -- Assigned A2
to $8 billion in committed credit facilities
Outlook Changed To Stable From Negative:
..Issuer: AT&T Inc.
..Issuer: AT&T Corp.
..Issuer: AT&T Mobility LLC
..Issuer: BellSouth Capital Funding Corporation
..Issuer: BellSouth Corporation
..Issuer: BellSouth Telecommunications, Inc.
..Issuer: New Cingular Wireless Services, Inc
..Issuer: Pacific Bell
..Issuer: SBC Communications Capital Corporation
..Issuer: South Central Bell Telephone Co
..Issuer: Southern Bell Telephone & Telegraph
Company
RATINGS RATIONALE
AT&T's A2 senior unsecured rating reflects the company's position
as the largest telecommunications company in the U.S. and
its strong and well-diversified cash flow. The company's
rating is also supported by its dominant position as the #1 or #2
operator in nearly all of the key segments in which it operates.
At the same time, the rating reflects the potential for negative
forces to pressure AT&T's fundamental operating profile, namely
the secular declines in the company's core residential wireline operations,
persistently weak macroeconomic conditions that have delayed the rebound
in the enterprise and wholesale businesses and maturation of the wireless
industry in the U.S. Moody's believes that strong competition
coupled with these forces will continue to constrain meaningful growth
in EBITDA margins and free cash flow over the intermediate term.
An important driver of Moody's decision to stabilize AT&T's
outlook was the rating agency's assessment of the company's
ability to manage to its stated target net Debt/EBITDA leverage of between
1.3-1.5 times. Moody's standard adjustments
for pensions and capitalizing operating leases add 0.4-0.5
times to the leverage calculations. (Note: Moody's
does not include non-pension post-retirement benefit obligations
in its debt calculations.) Under Moody's adjustments,
the company's total Debt/EBITDA leverage stood at about 2.0
times at September 30, 2010. Moody's believes that
proforma for the anticipated debt paydown by year-end 2010,
and expected EBITDA growth in the wireless business, the company's
adjusted leverage will remain below 2.0 times. Moreover,
Moody's also expects the company to stage its stock buyback activity
to remain within its stated leverage targets, funded primarily with
excess cash flow, which incorporates the pending acquisition of
roughly $2 billion in wireless spectrum assets from Qualcomm Inc.
in the second half of 2011.
Moody's believes that if AT&T loses the exclusive U.S.
iPhone contract, the company will most likely sustain its current
level of cash flow by maintaining rational pricing and customer acquisition
policies. In Moody's view, AT&T's strong
base of 94 million wireless subscribers, including 68 million with
monthly contracts, would keep EBITDA from its wireless business
stable once the initial shock of the iPhone customer defections wears
off by the end of the first year, and the industry settles into
a steady state of competitive alignment.
Although AT&T's enterprise business took a hit during the recession,
AT&T's wireline units stand to benefit from increased customer
demand once the economy improves. If the economic rebound proves
robust and sustainable, revenues from the segment should grow in
late 2011. Historically, rebounds in enterprise telecom spending
trail recoveries in the broader economy by about six months.
Based on Moody's expectations for free cash flow generation over
the next two years and management's indications that it is targeting a
net 1.3-1.5 times debt leverage, Moody's believes
that a rating upgrade is unlikely over the next couple of years.
AT&T's rating could be downgraded if a greater-than-expected
deterioration in the company's wireline segment, increased competition
in the wireless segment, or changes in the regulatory environment
cause the company's leverage (Moody's adjusted) to remain above
2.0 times and Free Cash Flow/Debt to stay below 5%.
Negative rating pressure would likely develop if the company's financial
policies were to materially deviate from its commitment to maintain a
strong balance sheet and liquidity, and the company's leverage target
of 1.5 times (without any of Moody's adjustments) were to become
unsustainable or unattainable.
The principal methodology used in this rating was Moody's Global Telecommunications
Industry rating methodology published in December 2007.
Moody's most recent rating action for AT&T was on August 4,
2010. At that time Moody's assigned an A2 Senior Unsecured rating
to the company's new senior unsecured notes.
AT&T, the largest telecommunications company in the USA,
is headquartered in Dallas, Texas.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Gerald Granovsky
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's affirms AT&T's A2 rating; changes outlook to stable on sustained deleveraging
