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Rating Action:

Moody's places DIRECTV Holding's debt ratings on review for upgrade

19 May 2014

Approximately $20 billion of rated debt affected

New York, May 19, 2014 -- Moody's Investors Service placed DIRECTV Holdings LLC's ("DTV Holdings") Baa2 senior unsecured long term debt ratings on review for upgrade following AT&T Inc's ("AT&T" -- A3, on review for downgrade) announcement to acquire publicly owned DIRECTV ("DTV") in a $48.5 billion stock and cash transaction. The total transaction value is $67.1 billion including DTV Holdings' net debt. DTV Holdings is a wholly-owned U.S subsidiary of DTV and the largest direct to home pay-TV provider in the U.S. with 20.3 million subscribers and 18.1 million Latin America subscribers. The transaction is subject to governmental and regulatory approval as well as approval by DTV's shareholders and is expected to close within approximately 12 months. DTV's Prime-2 short-term rating is not under review.

RATINGS RATIONALE

Among the factors Moody's will consider in its ratings review process are whether or not AT&T will guarantee DTV Holdings' outstanding debt, and if not, the implicit support benefit and ratings uplift attributable to DTV Holdings' ownership by the higher rated AT&T. Moody's review will also focus on the legal structure and the risks of successfully integrating DIRECTV into AT&T's longer term plans. If AT&T were to issue debt at DTV Holdings or DTV Latin America in order to fund the transaction and not guarantee DTV Holdings' borrowings, the company's financial risk profile may well come under downward pressure, which could have negative rating implications that mitigate the credit strengths of the transaction. However, Moody's considers the likelihood of such a scenario to be somewhat unlikely as we believe that AT&T will issue new debt (for the transaction) at the corporate parent level in order to take advantage of lower interest costs at AT&T.

Depending on the rating outcome for the AT&T ratings review and assuming the transaction proceeds as currently outlined, and in the absence of any additional debt issued at DTV Holdings or DTV Latin America, we expect ratings could be either confirmed at Baa2 by Moody's or upgraded by no more than one notch. In the event AT&T is downgraded by one notch to Baa1 and DTV Holdings' debt is not guaranteed by AT&T post merger, Moody's will evaluate to what extent the expected benefits from AT&T's ownership outweigh our concerns surrounding reduced free cash flows and financial flexibility and warrant a higher rating than the current Baa2. Long term operational benefits from the deal include (i) enhanced scale with a combined video subscriber base of roughly 26 million and AT&T's position as one of the two strongest US wireless service providers, (ii) broader product diversity, (iii) cost synergy benefits, which the companies estimate could exceed $1.6 billion on an annual run rate basis by year three post closing and (iv) AT&T's owned broadband internet product which DTV currently does not have except through joint ventures. On the downside, the deal will significantly reduce DTV Holdings' financial flexibility given the likely up streaming of cash flows to the parent company to sevice a higher dividend and higher interest costs. Further, as part of the agreement, DTV's video service will continue to be available at nationwide package prices to all customers for at least three years after closing. Accordingly, we believe that on a standalone basis DTV's margins and cash flows will be pressured under the strain of rising programming costs, competition and the inability to pass on these costs via price increases to subscribers.

If AT&T puts strong unconditional cross guarantees in place between itself and DTV Holdings to simplify the legal structure into a single credit, DTV Holdings' ratings will likely move to align with AT&T's long term debt ratings. We anticipate the companies will decide on the transaction's final legal structure and/or use of customary cross and holding company guarantees closer to the completion date of the deal.

DIRECTV Holdings LLC is a wholly-owned, U.S. operating company of DIRECTV, and is the largest direct-to-home digital television service provider in the United States with 20.3 million domestic subscribers and 18.1 million Latin America subscribers (includes the company's 41% equity method investment in Sky Mexico). DIRECTV's revenue for FY2013 was $31.75 billion.

The principal methodology used in this rating was Global Pay Television - Cable and Direct-to-Home Satellite Operators published in April 2013. 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.

Neil Begley
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 C 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 places DIRECTV Holding's debt ratings on review for upgrade
No Related Data.
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