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Announcement:

Moody's says AT&T's tender offer is positive, likely to reduce structural subordination

02 Nov 2017

New York, November 02, 2017 -- Moody's Investors Service, ("Moody's") said that AT&T Inc.'s (AT&T or the company) recently announced tender offer is credit positive because it has the potential to reduce the degree of structural subordination suffered by unsecured creditors at AT&T Inc. On October 30, 2017, AT&T announced a debt exchange offer for 46 series of notes for new notes issued by AT&T Inc. The offer included approximately $6 billion of debt issued by subsidiary obligors, including issuers within the company's DirecTV, AT&T Mobility and AT&T wireline telephone subsidiaries. The tender offer has the potential to reduce the degree of subordination by up to 4% if fully accepted.

If the tender offers are fully accepted by holders of the current notes, the amount of structurally senior debt in AT&T's capital structure will decline from 14% at September 30 to 10%. Pro forma for the acquisition of Time Warner Inc., the amount of structurally senior debt will increase to approximately 20%, if the recently announced tender is fully accepted by holders of AT&T's subsidiary debt.

As of June 30, 2017, AT&T's capital structure included $25 billion (or 14%) of debt and other obligations which are structurally senior to the $160 billion of unsecured debt issued by AT&T Inc; $5.6 billion at wireline subsidiaries, $1.3 billion of unsecured debt and $8.3 billion of preferred equity interest in wireless subsidiaries and $0.8 billion of unsecured debt at DIRECTV Holdings, LLC. The $20 billion also includes the company's growing accounts receivable securitization program that represents a senior claim on certain receivables which was approximately $3.9 billion (net) at June 30, 2017. Moody's estimates that this program will grow towards $5 billion over the next 12-18 months. AT&T could decide to pursue additional securitized financing given its large device receivable balance. We would view this positively from a liquidity and market access perspective, but it could further worsen the subordination of unsecured creditors of AT&T Inc. Moody's also believes that the company's unfunded pension obligations represent a priority claim relative to the unsecured creditors of AT&T Inc., even though this claim may not be contractually so.

AT&T's $12 billion bank credit facility allows it to add it AT&T Mobility as an obligor to the agreement. Although this option is unlikely to be exercised by the company, it could result in additional debt with a structurally senior claim on the wireless business.

The $25 billion of structurally senior debt of AT&T represents a material portion of total indebtedness, but does not currently result in any notching of the parent debt ratings. This is primarily because the company's most profitable businesses, its wireless and DTV subsidiaries are largely unencumbered and available to service the liabilities of the parent AT&T Inc.

The acquisition of Time Warner could add up to $23 billion of structurally senior debt to AT&T's structure. At this time, AT&T has not provided guidance on the long term plan for this debt. If it remains in place and is not cross guaranteed, then it will worsen the subordination of AT&T Inc. by approximately 10% after deal close. This level of subordination could result in a notching of the ratings, although we expect AT&T to address this issue over time.

AT&T has historically addressed structural subordination by opportunistically engaging in tender offers and obligor exchanges to move debt from acquired subsidiaries to the parent, AT&T Inc. We expect AT&T to continue to simplify its capital structure in this manner and will take a long term view on the subordination issue. We are unlikely to apply notching of instruments in the capital structure so long as AT&T makes measurable progress in reducing subordination. However, the degree of subordination in the structure is a qualitative consideration in AT&T's overall creditworthiness. Lack of measurable progress in reducing subordination could add pressure to AT&T's unsecured rating, especially if fundamental drivers were to weaken.

AT&T's strong competitive position, stability, scale and diversity of revenues result in tremendous qualitative credit strength. AT&T is the market leader in nearly all of its businesses and has valuable assets, predictable revenues, healthy margins and consistently invests for the long term. Yet, these qualitative strengths are offset by weak financial metrics, anemic growth and a broad vulnerability to disruption. Its balance sheet size could test the depth of the credit market, while its free cash flow after dividends is very limited. AT&T is susceptible to tighter credit, further competitive pressure, technological disruption and macroeconomic trends. We think this risk profile is asymmetrically skewed to the downside, especially if these potential negative developments were to simultaneously occur.

Moody's could raise AT&T's rating to A3 if leverage is sustained below 2.5x and free cash flow improves to 5% of debt. A ratings upgrade would also be predicated on management demonstrating a commitment to lower leverage over a long time horizon. Moody's could downgrade AT&T's rating to Baa2 if free cash flow is negative or if leverage remains above 3x, both on a sustained basis.

AT&T Inc., the largest telecommunications company in the US, is headquartered in Dallas, Texas. In July of 2015, AT&T completed the acquisition of satellite provider DIRECTV and became the largest pay TV provider in the US and a major player in the Latin American market. We estimate AT&T's consolidated revenues will be approximately $160 billion for the full year 2017.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Mark Stodden
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

John Diaz
MD - Corporate Finance
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.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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