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Rating Action:

Moody's affirms AT&T's A2 rating; changes outlook to stable on sustained deleveraging

Global Credit Research - 21 Dec 2010

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
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