TELECOMMUNICATIONS INDUSTRY LOSES SIX Aaa RATINGS, MOODY'S CITES LARGER, CLOSER-KNIT CORPORATE FAMILIES
Moody's Investors Service has adjusted the debt ratings of eleven telephone companies, downgrading eight and upgrading three, which brings these companies' ratings closer in line with those of their parent holding companies.
Downgraded are the senior unsecured debt of Bell Atlantic-New Jersey, Inc.; Bell Atlantic-Virginia, Inc.; and Bell Atlantic-Delaware, Inc., to Aa2 from Aaa, and the senior unsecured debt of Bell Atlantic-Pennsylvania, Inc. to Aa2 from Aa1. The senior unsecured debt of Bell Atlantic - Washington, D.C., Inc. has simultaneously been upgraded to Aa2 from Aa3. All of these ratings will, however, be kept under review for possible downgrade as a result of the proposed merger between Bell Atlantic Corporation (rated A1) and GTE Corporation (rated Baa1).
Also downgraded are the debt issues of Indiana Bell Telephone Company, Ohio Bell Telephone Company, and Wisconsin Bell Telephone Company, all to Aa1 from Aaa for their senior unsecured debt. These ratings will remain under review for possible further downgrade as the necessary approvals for the combination of their parent, Ameritech Corporation (rated Aa3), with SBC Communications (rated A1) are sought.
Moody's also announced several other rating actions affecting the subsidiaries of Sprint Corporation (rated Baa1). Sprint Spectrum L.P.'s senior secured and unsecured debt has been upgraded to Baa2 and Baa3 from Ba1 and Ba2, respectively. The senior secured debt of United Telephone Company of Pennsylvania has been upgraded to A1 from A2. However, the senior unsecured debt rating of Carolina Telephone and Telegraph Company is downgraded to A2 from A1.
According to Moody's Senior Vice-President Dennis Saputo, the rating actions reflect a trend in the industry towards managing the telephone operating companies within any given family as a single unit. They also recognize that industry consolidation and diversification is accelerating under the pressure of an increasingly competitive domestic telecommunications market, thereby expanding the number of companies under a single corporate umbrella and increasing the possibility of cross-subsidization of subsidiaries deemed strategic.
Moody's Saputo explains that in the past, individual telephone companies within the same corporate family could be separated by as many as five rating notches, based on the individual characteristics of their franchises, operations, and their relative financial strength.
But in the future, the rating differentials between telephone operating subsidiaries of the same family will generally be no more than two or three notches wide. The composite of these ratings in turn will be only about two notches off the parent holding company's rating. Ratings of other subsidiaries considered by Moody's to be of "strategic importance" to the combined entity will be similarly notched. The narrower ratings gap results from the increasing diversification by the parent company into new "strategic" areas of business development, including wireless telephony, data, cable TV, as well as developmental stage telecommunications opportunities.
Like diversification efforts of the past, which were oriented primarily toward non-strategic, financial investments, today's investments possess higher risk characteristics and are often highly leveraged. These factors combine to pressure the credit risk profile of the consolidated entity. However, unlike the past, today's investments are often viewed as essential services by companies positioning themselves as total communications providers. This assessment makes it increasingly likely that they would not walk away in a time of stress and make it more likely that the parent would tap the telephone operating subsidiaries for financial support.
Moody's Saputo concludes that "investors in the telephone subsidiaries are invariably affected by the diversification activities of the parent. The scope of available opportunities, the strategic importance of diversification, and the magnitude of the capital being committed suggest that the insulation of the telephone subsidiaries from other operations is weakening. Consequently, the ratings gap is likely to continue to shrink as the industry's business decisions and our view of projected financial performance reflect the risks associated with a more competitive telecommunications environment."
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NOTE TO JOURNALISTS ONLY: For more on telecommunications ratings, "Moody's Methodology for Rating Diversified Telecommunications Companies" is available by contacting Donna Gee in New York (212) 553-0376, Andrew Chmaj in London (171) 772-5454, Juan Pablo Soriano in Madrid (341) 310 1454, Beverly Hughes in Sydney (612) 9270 8111, Mauricette Salque in Paris (331) 53 30 10 20, Juergen Berblinger in Frankfurt (4969) 242 840, Velvet Yoshinami in Tokyo (813) 3593 0734, Hilary Parkes in Toronto (416) 214-1635, Lorraine Yee in Hong Kong (852) 2916 1112, Kathryn Kerle in Singapore (65) 333 6321 or Christiana Aguiar in SÆo Paulo (5511) 3043-7186.
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