Verizon (VZ) Could Miss 'A3' Rating Upgrade if Low-Rate Environment Persists - Moody's

Verizon Communications' (NYSE: VZ) strong performance since acquiring full ownership of Verizon Wireless puts the company in a position to recapture its A3 rating, but it may decide to forego the higher rating if the current low interest rate environment persists, making the company's debt attractive to yield-hungry investors, says Moody's Investors Service.

Moody's had downgraded Verizon's long-term debt rating to Baa1 from A3 in September 2013, at the time of the acquisition, with Verizon stating that it would restore its A rating by 2019.

The company has reduced its leverage, largely on the strength of the wireless business, which generates strong earnings and huge cash flow, according to the report "Wireless Is the Key to Recapturing its A3 Rating -- If it Wants To."

However, if interest rates remain low, the company may decide that further deleveraging is not beneficial.

"Verizon has the capacity to attain credit metrics consistent with an A rating, but with investors willing to invest in lower rated debt while searching for yield, Verizon may not want to restore its A rating," said Dennis Saputo, a Moody's Senior Vice President. "In such a scenario, we think investors would 'forgive' Verizon for abandoning its plan because its access to the debt markets would remain strong and the cost of its debt wouldn't rise much."

Moody's says that although growing demand for wireless services and Verizon's strong 4G LTE network will lead to continued huge cash flow generation for the company, certain factors could affect Verizon's timeline to achieving a financial profile consistent with an A rating, including US corporate tax policies, additional spectrum purchases and the possibility of M&A activity.

Verizon would more likely pursue an A rating if interest rates rise, changing the balance between the cost of the company's debt and equity, and lowering its earnings via higher interest rate expenses.

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