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Rating Action:

Moody's affirms AT&T's ratings and assigns Ba1 rating to its new preferred stock issuance

05 Dec 2019

New York, December 05, 2019 -- Moody's Investors Service (Moody's) affirmed AT&T Inc.'s ratings (AT&T), including the Baa2 senior unsecured rating and the Prime-2 commercial paper rating, and assigned a Ba1 rating to its planned new Series A Perpetual Preferred Stock (preferred stock). AT&T intends to use the net proceeds for general corporate purposes, which Moody's believes may include the repurchase of its common stock under its ongoing share repurchase program. The outlook for AT&T remains stable.

Assignments:

..Issuer: AT&T Inc.

....Pref. Stock Non-cumulative Preferred Stock, Assigned Ba1

Affirmations:

..Issuer: AT&T Inc.

....Senior Unsecured Shelf , Affirmed (P)Baa2

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Revolving Credit Facility, Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: AT&T Corp.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: BellSouth Corporation

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Indiana Bell Telephone Company, Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Pacific Bell

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

Outlook Actions:

..Issuer: AT&T Corp.

....Outlook, Remains Stable

..Issuer: AT&T Inc.

....Outlook, Remains Stable

..Issuer: BellSouth Corporation

....Outlook, Remains Stable

..Issuer: Indiana Bell Telephone Company, Inc.

....Outlook, Remains Stable

..Issuer: Pacific Bell

....Outlook, Remains Stable

RATINGS RATIONALE

The affirmation of the Baa2 senior unsecured rating is based upon the company's solid credit metric positioning relative to its credit rating following a year of focused debt reduction. The Ba1 rating assigned to AT&T's preferred stock reflects the security's relative position in the company's capital structure compared to AT&T's senior unsecured rating, which represents AT&T's ability to honor senior unsecured debt and other debt like obligations. The preferred stock is subordinated, and junior in right of payment, to AT&T's outstanding long-term debt. It is also subordinated to any future subordinated debt issuance, though there is none as of today. The two notch differential between the Ba1 assigned to the Series A Preferred Stock and AT&T's Baa2 unsecured rating is consistent with our methodology guidance for notching corporate instrument ratings based on differences in security and priority of claim.

The preferred stock contains equity-like features including no stated maturity and the option to skip coupon payments if the common stock dividend is suspended. Since investment-grade issuers have rarely missed coupon payments on these types of securities, Moody's considers the cash flow stream associated with them to be similar in nature to the cash outflows associated with servicing debt. As a result, these securities receive only partial equity treatment in Moody's calculation of debt coverage and financial leverage ratios. The preferred stock will receive basket "C" treatment (i.e. 50% equity and 50% debt) for the purpose of adjusting financial statements. Please refer to Moody's cross-sector rating methodology "Hybrid Equity Credit" (September 2018) for further details.

AT&T has improved its credit metrics which were weak following its acquisition of Warner Media, LLC in mid-2018 and strengthened its positioning for its Baa2 rating. The company followed the acquisition with steady and material debt reduction in 2019. Debt to EBITDA leverage with Moody's adjustments as of September 30, 2019 was 3.3x. However, Moody's expects further improvement in credit metrics to dramatically slow next year given the significant shift in the company's use of pre-dividend free cash flows as management recently announced its new 3-year capital plan, which includes $45 billion of dividends and $30 billion of share repurchases over the next three years.

The company benefits from leading positions, important brands, scale and revenue diversity that result in substantial qualitative credit strength. AT&T, a market leader in nearly all of its businesses, has valuable assets, predictable revenue, and healthy margins. But these qualitative strengths are offset by outsized shareholder dividends and expected share repurchases, anemic top line growth and subscriber losses in several of its important segments. Moody's believes the company is facing secular, competitive and transition pressures in its primary segments due to continued vulnerability from business disruption across its end markets. In addition, continued material subscriber losses could further limit financial flexibility and capacity relative to its credit ratings in the future unless matched with debt reduction.

The company's financial policy has the potential to become more aggressive given its moderately levered capital structure, its new three-year capital plan, its growing common stock dividend, and recent shareholder activism. The company has identified a company-calculated net debt to EBITDA target of around 2.5x for year-end 2019 (about 3.1x with Moody's adjustments), which the company is on track to achieve, and around a quarter of a turn or more lower over the next three years. As of September 30, 2019, company-calculated net debt to EBITDA was 2.7x. AT&T also publicly stated it will consider some share repurchases in the fourth quarter of 2019. From 2020 to 2022, the company commented that it expects to return $75 billion to shareholders through $30 billion of share retirements and $45 billion in dividends. Moody's views these developments as credit negative in the face of a still high debt load and significant capital investment needed to remain competitive for the long-term.

Moody's expects that AT&T will maintain good liquidity over the next 12 to 18 months. As of September 30, 2019, AT&T held around $6.6 billion in cash, which was augmented by two undrawn $7.5 billion committed bank facilities totaling $15 billion and which mature in December 2021 and December 2023, respectively. The facilities provide same-day availability for US dollar advances and are subject to an ongoing maintenance test (debt/EBITDA of 3.5x). Moody's expects AT&T to remain comfortably in compliance with the leverage covenant. We expect annual free cash flow of at least $15 billion for the next 12 months. This free cash flow amount does not include additional liquidity available from the company's accounts receivable (A/R) securitization program nor after-tax in process asset sale proceeds. Asset sales of between $5 and $10 billion are planned during 2020. Moody's believes believe AT&T typically carries between $5 and $6 billion dollars of cash on its balance sheet for operational purposes. As of September 30, 2019, AT&T has $7.2 billion of debt maturities for the next 12 months, excluding $0.5 billion of zero coupon bonds and $1.0 billion of remarketable bonds that are both puttable annually but unlikely to be redeemed. We believe that AT&T's free cash flow, proceeds from asset sales, along with proceeds from the company's A/R securitization facility will be sufficient to meet upcoming cash needs for the next 12 months, excluding any material asset purchases.

AT&T's stable outlook reflects our expectation that the company's fundamentals, while under some pressure, will remain relatively stable overall for the near-term, largely due to debt and leverage reduction that occurred in 2019. In addition, Moody's expects free cash flow will remain well in positive territory, the degree of structural subordination in the consolidated post-close capital structure will be managed down to pre-WarnerMedia merger levels and liquidity will remain robust enough to comfortably address upcoming debt maturities and all other business needs.

Moody's could raise AT&T's rating if fundamentals improve, particularly with regard to subscriber numbers, investment in 5G wireless and new TV services is competitive, leverage (with Moody's adjustments) falls and is sustained below 3x and free cash flow to debt remains stable (except during important investment cycles).

Moody's could downgrade AT&T's rating if free cash flow to debt declines or becomes negative or if Moody's adjusted leverage is above 3.5x, both on a sustained basis. In addition, worsening secular or other declining fundamentals and/or profit margins could result in the need for stronger credit metrics for the Baa2 rating or could result in a downgrade of the company's debt ratings. If liquidity weakens and the company is viewed as facing moderate to high refinance risk rating pressure could also rise.

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

AT&T Inc. (AT&T), the largest telecommunications company in the US, has its headquarters in Dallas, Texas. In June 2018 AT&T completed its merger with Warner Media, LLC, adding the global media and entertainment platforms of Warner Bros., HBO and Turner to its sizable mobile, video, and broadband customer relationships. AT&T completed the acquisition of satellite provider DirecTV in July 2015, becoming the largest pay TV provider in the US. For the last 12 months ended September 30, 2019, AT&T generated $182 billion of revenue.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Neil Begley
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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