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Rating Action:

Moody's downgrades Verizon's long-term debt rating to Baa1 following Vodafone announcement

Global Credit Research - 02 Sep 2013

Stable outlook

New York, September 02, 2013 -- Moody's Investors Service ("Moody's") downgraded the long-term debt ratings of Verizon Communications, Inc. ("Verizon" or "the company") and its subsidiaries by one notch as a result of its decision to purchase Vodafone Group Plc's ("Vodafone") stake in Cellco Partnership (d/b/a Verizon Wireless) with a significant component of debt. The company announced that it will be buying out Vodafone's 45% ownership in Verizon Wireless ("VZW") for about $130 billion, consisting of about $60 billion of cash, about $60 billion in new equity that will distributed to Vodafone's shareholders, a $5.0 billion note payable to Vodafone with the remainder consisting of Verizon's 23.1% stake in Vodafone Italy valued at about $3.5 billion and other considerations. The downgrade reflects the increase in leverage (Debt to EBITDA) resulting from the addition of about $67 billion of new debt which will more than double Verizon's debt load to $116 billion (GAAP) upon closing of the transaction. In addition, the approximately 1.3 billion shares of new common stock that the company will have to issue will have a large impact on its ability to generate free cash flow (and deleverage) since it increases Verizon's annual common stock dividend by about 50% to about $9 billion. Consequently, we expect leverage to remain elevated for quite some time. The company's Prime-2 short-term debt rating is affirmed. The rating outlook is stable.

Today's rating action reflects Moody's belief that there is a high degree of certainty that this will receive the required approvals from shareholders and government authorities and that any variations to the structure will not be material for the ratings. This view considers that Verizon already has effective control of the partnership and that its interest in acquiring the balance has been well known for several years.

Moody's has taken the following rating actions:

..Verizon Communications, Inc.

....Issuer rating, downgraded to Baa1 from A3

....Senior unsecured rating, downgraded to Baa1 from A3

....Senior unsecured shelf, downgraded to (P)Baa1 from (P)A3

....Short term rating, affirmed at Prime-2

....Outlook, maintained at Stable

..Cellco Partnership

....Issuer rating, downgraded to A3 from A2

....Senior unsecured rating, downgraded to A3 from A2

....Outlook, maintained at Stable

..Verizon Wireless Capital LLC

....Senior unsecured rating, downgraded to A3 from A2

....Outlook, maintained at Stable

..GTE Corporation

....Senior unsecured rating, downgraded to Baa2 from Baa1

....Outlook, maintained at Stable

..Verizon Global Funding Corp.

....Senior unsecured rating, downgraded to Baa1 from A3

RATING RATIONALE

"The downgrade to Baa1 from A3 is based on our expectation that, for an extended period of time, leverage will be materially higher than our prior forecast," stated Dennis Saputo, Moody's Senior Vice President. Historically, Moody's has evaluated Verizon on a proportionate consolidated basis, carving out Vodafone's 45% stake in VZW from Verizon's earnings and cash flow. Based on this analysis, LTM June 30, 2013 leverage (Debt/EBITDA, Moody's adjusted) was a little over 2.5 times and steadily trending down. "This transaction will cause leverage to spike and remain elevated for an extended time frame as higher interest expense and increased dividend payments offset the distributions that Verizon will retain as a result of acquiring 100% ownership of VZW, reducing the amount of cash available for debt reduction," continued Saputo. "In addition, our expectation for significantly higher cash tax payments beginning in 2014 will limit Verizon's ability to reduce the incremental $67 billion of debt associated with the transaction," concluded Saputo.

Based on Moody's projections (pro-forma for the transaction closing on January 1, 2014), Verizon's consolidated Moody's adjusted debt balances will be about $127 billion at the end of 2014 (assuming that all excess cash between now and then is applied toward reducing debt). FYE 2014 leverage (Moody's adjusted) is projected to be about 2.9x. EBITDA is expected to grow over 5% in 2014 (and 2015) mainly due to the continued strong performance of Verizon Wireless but also reflecting margin expansion at the wireline segment. Constraining free cash flow is the increase in cash taxes coming from Verizon gaining 100% ownership of Verizon Wireless, the additional interest cost from the $67 billion debt raise and the increase in dividends from the additional shares issued. Consequently, even if Verizon uses all of its free cash flow to reduce debt (as expected), debt balances will still be over $120 billion (Moody's adjusted) at the end of 2015 and leverage will be around 2.7 times.

Verizon's Baa1 long-term debt rating reflects its significant scale of operations, the diversity of its revenue mix and a strong market position across all business segments, particularly wireless. Constraining the rating is the large amount of debt undertaken to buy out Vodafone's stake in Verizon Wireless, a large common stock dividend and the high levels of capital expenditures required in the industry. The rating assumes that Verizon will use all available cash to de-leverage as it strives to reduce the $116 billion of debt (GAAP) on its balance sheet the day the transaction closes.

The A3 rating on Verizon Wireless reflects it exceptionally strong cash generating capabilities, very low leverage and its structural senior position as an operating company. The one notch difference between the Baa2 rating on GTE Corporation and the Baa1 rating of Verizon reflects the fact that the full guaranty provided by Verizon Communications does not ensure timely payment. That said, the operations that fall under GTE Corporation still represent a significant component of Verizon's overall business and we believe that Verizon will be motivated to make timely payments on this debt.

The stable rating outlook reflects Moody's expectations that Verizon will maintain its current trajectory and experience continued EBITDA growth and margin expansion at both the wireless and wireline operations and will use all available cash to de-leverage until leverage drops below 2.5 times (Moody's adjusted).

While unlikely in the near future due to the large amount of debt issued, Moody's could eventually raise the company's ratings if operating performance exceeds our expectations. Specifically, positive rating pressure could develop if Verizon's adjusted Debt to EBITDA and Free Cash Flow to Debt ratios were likely to be sustained below 2.5x and above 5%, respectively.

The ratings could come under pressure if adjusted Debt/EBITDA was likely to exceed 3.0 times or FCF/Debt remains in the low single digits for an extended time period. The most likely reasons for this would be: i) Verizon Wireless' operating performance falters as a result of increasing competition and/or industry pricing pressure; ii) the financial performance of the wireline operations deteriorates; or iii) Verizon commences a series of debt funded acquisitions, including large amounts of debt funded spectrum purchases.

The principal methodology used in this rating was Global Telecommunications Industry published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Dennis Saputo
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's downgrades Verizon's long-term debt rating to Baa1 following Vodafone announcement
No Related Data.

 

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