Moody's confirms Verizon Communications at A3; outlook negative
Approximately $45 Billion of Long-term Debt Affected
New York, October 29, 2008 -- Moody's Investors Service confirmed the A3 senior unsecured rating of
Verizon Communications (VZ) based on Moody's assessment that the
cash flows generated by Verizon Wireless (VZW) will continue to grow at
a healthy rate despite the U.S. economic downturn.
We anticipate that, especially over the next two years, the
bulk of this cash will be directed to Verizon Communications as VZW quickly
repays an inter-company loan. The pending acquisition of
Alltel will increase leverage quite significantly. However,
the cash flows generated by Verizon Wireless, in combination with
our expectation that future share repurchases will be limited, should
allow Verizon Communications to meet its various obligations and investment
needs and reduce debt.
"Cash flows from Verizon's wireless business have been strong, and
we expect that to continue despite the soft economy," said Dennis
Saputo, Moody's Senior Vice President. "The strength
of the wireless business offers substantial support to the rating,
and helps offset challenges in some of the wireline subsidiaries."
Moody's also lowered the ratings of 4 wireline-operating
companies because we expect their financial profiles to remain under pressure
as a result of intense competition, combined with the high,
albeit declining, costs of the FiOS project. In addition,
Moody's confirmed the ratings of 9 Verizon wireline subsidiaries
based on the expectation that the parent company will continue to provide
a level of support that enables the credit profiles at these companies
to remain close to current levels.
The outlook for Verizon and all its subsidiaries is negative. "The
negative outlook reflects execution risks associated with Verizon's
plan to reduce its leverage to a level that is commensurate with the A3
rating following the Alltel acquisition amid a weakening economy",
commented Saputo. In addition, the company faces very large
financing needs related to the acquisition during a period of difficult
market conditions. The parent company's existing $6
billion revolver matures in September 2009, the remaining financing
for the Alltel acquisition (estimated at about $21 billion) is
uncommitted and a little over $7 billion of debt matures in the
next twelve months.
These actions complete the ratings review of Verizon and its subsidiaries
initiated on June 6, 2008 when Verizon announced that its 55%
owned subsidiary, Verizon Wireless, planned to acquire Alltel
for about $28.1 billion in cash and assumed debt.
Moody's is in the process of evaluating Verizon Wireless and will be assigning
a rating to the company shortly. The review of Alltel's debt
ratings, initiated at the same time, remains ongoing pending
greater assurance that the transaction will close as expected.
The complete list of rating actions follows at the end of this press release.
Further Rationale for Confirmation of Verizon Communications Ratings
The confirmation of the parent company's A3 rating reflects Moody's
assessment that the free cash flows generated by Verizon Wireless will
continue to grow at a healthy pace, despite a slowing economy,
as the company benefits from economies of scale, the high operating
leverage inherent in its business model and synergies resulting from its
acquisition of Alltel.
Moody's believes that VZW's state-of-the-art network
supports excellent service quality, a strong brand reputation,
and allows the company to successfully introduce new and enhanced service
offerings, leading to above-average revenue growth and below-average
churn rates. These factors, when coupled with an efficient
cost structure are expected to lead to steadily improving earnings and
cash flows which will should allow Verizon Wireless to steadily reduce
the significant amount of debt incurred in the acquisition of Alltel.
Moody's anticipates that, especially over the next two years,
the bulk of the excess cash flow generated by VZW will be upstreamed to
Verizon Communications, enabling the parent to meet it various obligations
(including common stock dividends, debt service and taxes) and invest
in its wireline operations without incurring additional debt. The
A3 rating anticipates that parent company share repurchases will be limited
until the consolidated entity restores its balance sheet to targeted levels
of about 1.8 times Debt to EBITDA (Moody's adjusted for proportionate
consolidation of Verizon Wireless).
There are several challenges confronting Verizon Communications.
Although we expect VZW's contribution to Verizon's proportionate
earnings and cash flow to continue increasing from about 43% today,
a weakening economy may preclude the company from reducing debt levels
as quickly as initially expected. Wireless subscriber growth is
slowing as penetration increases toward 100% (from about 85%
today) and competition remains fierce. Switching costs are low
and pricing power is limited. Finally, it is unclear whether
expanding data usage will continue to offset pricing pressure on voice
services and sustain recent wireless ARPU growth, especially if
the U.S. economy weakens more than expected and if the downturn
"On the wireline side, overall business risk is still increasing
with accelerating line losses and the shift in the company's asset
base and investment needs toward highly competitive and capital-intensive
business segments like video, broadband and corporate data",
Saputo added. The margins on these products are significantly lower
than the margins on traditional voice services.
A reconfiguration of VZW's ownership structure is not factored into the
current ratings. A potential buyout of Vodafone's 45% stake
in VZW could have significant rating implications for the ratings of VZ,
its operating subsidiaries and VZW, depending on how the takeout
Rationale for Ratings Actions on the Wireline Operating Companies
Verizon New York
"The rating of Verizon New York was confirmed at Baa3 because of
the significant amount of support that this subsidiary receives from its
parent company --- an indication of its strategic
importance to Verizon", according to Dennis Saputo.
While Verizon has not taken a dividend from VZ-NY for several years,
in May 2007 Verizon reclassified $2.0B of VZ-New
York's intercompany debt to equity. In addition, access
line losses appear to have moderated (dropping from 10.8%
in 2006 to 9.8% in 2007) and the company's annual
revenue decline has slowed to less than 5% for the first time in
Nevertheless, intense competition, a very high cost structure,
a difficult regulatory environment and a very weak balance sheet make
it unlikely that the company will be able to significantly strengthen
its credit metrics materially over the next few years. Moody's
expects that Verizon New York's free cash flow will remain under
considerable pressure for some time, given the likelihood that access
line losses will continue to drive lower revenues, that much of
the company's cost structure is fixed, and that it faces the expense
of a significant network upgrade in its largest market, New York
City. A relatively significantly under funded pension obligation
also puts pressure on the rating. Consequently, Verizon New
York is likely to remain the lowest rated of the Verizon wireline subsidiaries
for quite some time.
Verizon New England
Moody's downgraded the senior unsecured long-term debt rating of
Verizon New England, Inc. (VZ-NE) to Baa2 from Baa1
because we believe that the financial profile of VZ-NE will continue
to be negatively impacted by strong competition, a high cost structure
and the expenses associated with ongoing fiber deployment (the project
is expected to be completed in 2010).
Competitive inroads and the investment associated with the FiOS network
upgrade have had only a modest impact on VZ-NE's leverage
profile over the last few years because of the actions taken by Verizon
to support VZ-NE's balance sheet. Access lines and
revenues have declined about 8% and 2%, respectively
in each of the last two years and EBITDA margins have gone from over 38%
in 2005 to just over 34% in 2007 (Moody's adjusted).
Debt to EBITDA increased to 3.0x over the same period.
Earlier this year Fairpoint Communications merged with Verizon Maine,
Verizon New Hampshire, and Verizon Vermont in a reverse Morris Trust
transaction. The transaction closed on March 31, 2008.
In order to offset the loss of a portion of the earnings and cash flows
from these three states, a little over $500 million of VZ-NE's
debt was paid down and reduced through an internal exchange. Nevertheless,
Moody's believes that this transaction will increase VZ-NE's
Debt to EBITDA ratio by about 60 basis points since the amount of debt
reduction was only modestly higher than the loss of EBITDA.
Verizon Pennsylvania, Verizon New Jersey, and Verizon Maryland
The ratings of Verizon New Jersey, Verizon Pennsylvania, and
Verizon Maryland were all lowered to Baa1 from A3 because we believe that
competitive challenges in those states will remain intense. Access
line losses in all 3 states continued to increase in 2007, margins
at all three companies continue to steadily decline and investment spending
has increased materially in the last couple of years. Our rating
action incorporates Moody's belief that these companies are more likely
to rely on parent company support given their challenging competitive
environments and relatively significant investment needs. Consequently,
their leverage ratios are likely to remain among the highest in the Verizon
The senior unsecured debt rating of Verizon Virginia was confirmed at
Baa1 despite currently having one of the stronger balance sheets and higher
operating margins in the complex because we believe that cable competition
in the company's service territory will intensify materially in
the near future. Therefore, we expect access line loss rates
(which at 6.9% in 2007 were below the rated Verizon operating
company average of about 8.3%) to increase quickly and lead
to margin erosion and pressure on operating cash flows. Capital
spending has been above average over the last few years (in part due to
the region's high growth) and we expect it will remain elevated.
Consequently, we believe that the company's leverage metrics
will deteriorate modestly from current levels. At 51.9%
the company's EBITDA margin was well above the average for the rated
ILECs of 37.6% and Debt to EBITDA at 1.7 times was
below the rated ILEC average of 2.7 times (all ratios Moody's
adjusted for the twelve months ended June 30, 2008).
Verizon California, Verizon Delaware, Verizon North,
Verizon Northwest, and Verizon West Virginia
Moody's has confirmed the A3 senior unsecured ratings of Verizon
California, Verizon Delaware and Verizon Northwest as the rating
agency expects these companies to maintain their healthy cash flows and
moderate leverage over the rating horizon. Moody's expects
EBITDA margins for these three companies to remain strong and the level
of competition in their markets to remain stable in the near-term,
especially in Delaware and California, which already face intense
competition but where greater FiOS deployment is expected to moderate
subscriber losses to cable competition.
Moody's has also confirmed the A3 senior unsecured debt ratings
of Verizon West Virginia and Verizon North. While capital investment
has remained well below average at both these companies, competitive
challenges have also been slow to develop although recent line losses
at Verizon North indicate that competition is accelerating in that region.
However, EBITDA margins are over 60% at Verizon North and
its Debt to EBITDA ratio is 1.4 times, both metrics the best
of the Verizon operating companies. Consequently, Moody's
anticipates that the company will be able to sustain its strong credit
profile in the face of increasing competition.
While EBITDA margins are lower at Verizon West Virginia, competition
is expected to remain relatively subdued over the near-term (access
line losses were 7% in 2007) which should enable the company to
sustain a strong credit profile (Debt to EBITDA is 1.4 times).
GTE Southwest and Verizon Florida
The senior secured debt ratings of GTE Southwest and the senior unsecured
debt rating of Verizon Florida were confirmed at Baa1 because we expect
the operating performance of both companies to stabilize in the near-term.
Both companies were among the first to modernize their networks by deploying
fiber to homes. While the rate of access line loss continued to
increase during 2007 at Verizon Florida (in part, we believe due
to housing problems), we note that the rate of decline slowed at
GTE Southwest for the second year in a row and revenue growth at that
company accelerated to over 3.5% in 2007.
Parent Support of Wireline Subsidiaries
For several years now, Verizon has taken steps to support the credit
profile of its operating telephone companies. During this period,
the wireline subs have not issued any external debt while their individual
funding needs have been provided via inter-company loans from the
parent. In addition, Verizon has taken steps to keep the
level of total debt at each of the individual operating subs relatively
flat, mainly by restricting and, in some cases eliminating
the amount of dividends that the subs upstream. Nevertheless,
average leverage ratios have increased steadily over the last three years,
mainly because of earnings pressures as high margin legacy voice revenues
are replaced by lower margin revenue streams and high investment requirements.
Although Moody's continues to be concerned with the operating performance
of some of Verizon's wireline operating subsidiaries and we continue
to have our doubts about the ultimate return prospects of the FiOS investment,
we recognize that FiOS costs are coming down, deployment is on schedule,
the product is meeting with good customer acceptance, and that thus
far, the products penetration appears to have an inverse relationship
with the number of line losses in some markets.
Most importantly, we believe that Verizon's overall financing
policies of its wireline subsidiaries indicates relatively strong parental
support for these subsidiaries, consequently, we give these
subsidiaries, several notches of rating lift from the ratings that
would result from their individual, stand-alone credit quality.
Moody's believes that at least over the next 12 to 18 months,
the financial profile of most Verizon operating telephone subsidiaries
will continue to be pressured by strong competition and the expenses and
capital requirements associated with ongoing fiber deployment (the project
is expected to be completed in 2010). However, we believe
that significant previous network investment and additional cost reduction
initiatives should slowly enable most of these companies to begin to stabilize
their operating performance. While we expect that the earnings
and cash flow generating capacity of the group, as a whole,
will remain pressured through at least the middle of 2009, we believe
that dividends to the parent will be limited such that leverage metrics
at these subsidiaries, as a group, stabilize at about 3.0
times Debt to EBITDA, Moody's adjusted. For FYE 2007
and LTM to June 30, 2008, the average Moody's adjusted
Debt to EBITDA ratio for Verizon's rated wireline operating subsidiaries
was 2.7 times.
Complete list of rating actions:
Ratings confirmed are:
Verizon Communications: senior unsecured, A3
NYNEX Corporation: senior unsecured, A3
GTE Corporation: senior unsecured, Baa1
Verizon Delaware, Inc.: debentures, A3
Verizon West Virginia, Inc.: debentures, A3
Verizon North, Inc.: debentures, A3
Verizon Northwest, Inc.: debentures, A3
Verizon California, Inc.: debentures, A3
Verizon Virginia, Inc.: notes and debentures,
Verizon Florida, Inc.: debentures, Baa1
GTE Southwest, Inc.: first mortgage bonds, Baa1
Verizon New York, Inc.: notes and debentures,
Ratings downgraded are:
Verizon New England, Inc.: notes and debentures,
to Baa2 from Baa1
Verizon New Jersey, Inc.: debentures, to Baa1
Verizon Pennsylvania, Inc.: debentures, to Baa1
Verizon Maryland, Inc.: debentures, to Baa1 from
Ratings remaining on review for possible upgrade:
$2.3 billion Senior Unsecured Notes -- Caa1,
LGD 6 (95%)
$1.0 billion Senior Unsecured Toggle Notes --
Caa1 LGD 5 (79%)
Corporate Family Rating -- B2
Probability of Default Rating -- B2
$14.0 billion Senior Secured Term Loan B due 2015 --
Ba3, LGD2 (27%)
$1.5 billion Senior Secured Revolving Credit Facility due
2013 - Ba3, LGD2 (27%)
$7.7 billion Senior Unsecured Committed Bridge Facility
-- Caa1, LGD 5 (79%)
Please refer to Moodys.com for additional research.
Headquartered in New York City, Verizon Communications Inc.
is the second largest telecommunications provider in the United States
delivering broadband and other wireline and wireless communication services
to residential, business, government and wholesale customers.
Verizon Wireless, headquartered in Basking Ridge, NJ is a
joint venture between Verizon Communications, which owns 55%,
and Vodafone, which owns the remainder. Headquartered in
Little Rock, Arkansas, ALLTEL Corporation operates the nation's
largest wireless network (by geography).
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Alexandra S. Parker
Corporate Finance Group
Moody's Investors Service