Fitch Affirms AT&T IDR at 'A-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A-' Issuer Default Ratings (IDRs) and debt security ratings of AT&T Inc. (AT&T; NYSE: T) and its subsidiaries. The company's short-term IDR and commercial paper ratings have been affirmed at 'F2'. The Rating Outlook remains Stable. A full rating list is shown below.

KEY RATING DRIVERS

Large Scale and Financial Flexibility: The 'A-' rating assigned to AT&T is underpinned by the company's diversified revenue mix, its significant size and economies of scale as the largest telecommunications operator in the U.S., solid free cash flow (FCF) anticipated following the DIRECTV acquisition and Fitch's expectation that it will benefit from continued growth in wireless operating cash flow.

Deleveraging Expected: The rating and Stable Outlook reflect AT&T's intent to deleverage to a net leverage target of 1.8x and to dedicate FCF after dividends and any asset sale proceeds to the reduction of debt over the three-year period following the completion of the DIRECTV transaction in July 2015. Fitch estimates the DIRECTV and other 2015 transactions will cause 2015 pro forma net leverage to rise to 2.4x-2.5x from approximately 1.8x at year-end 2014. After 2015, Fitch believes leverage will gradually decline, likely reaching approximately 2x by the end of 2017, which in Fitch's view is appropriate for the 'A-' rating.

DIRECTV Acquisition: AT&T completed its acquisition of DIRECTV on July 24 for consideration of $47.1 billion. Consideration consisted of $14.4 billion of cash and equity of $32.7 billion, based on the value of AT&T's stock. In addition, DIRECTV had $15.9 billion in net debt for a total transaction value of $63 billion (about $4 billion less than when proposed due mainly to $2.7 billion less in net debt).

Spectrum Licenses Acquired: Debt levels have also increased due to the acquisition of spectrum in the Federal Communications Commission's (FCC) AWS-3 spectrum action, which closed at the end of January 2015. AT&T paid approximately $18.2 billion to acquire contiguous 10x10 MHz blocks of AWS-3 spectrum covering approximately 96% of the U.S. population. As this spectrum is deployed, it will increase capacity to support the rapid growth of data services on AT&T's mobile broadband network.

Broadcast TV Spectrum Auction: Potential spending in the FCC's 600 MHz TV broadcast auction, currently anticipated to occur in early 2016, is not included in Fitch's assumptions and will be an event-driven consideration. At the time of the DIRECTV acquisition announcement in May 2014, the company indicated it could bid up to $9 billion in the auction under certain conditions. As a spending level was not included as part of the final conditions of the DIRECTV acquisition, the company has indicated it will participate in the auction but has not committed to spending levels.

KEY ASSUMPTIONS

-- Wireline revenue declines are just over 2% in 2015 and trend toward the -1% to 0% range. Note that excluding the revenues from the Connecticut operations sold in late 2014 (approximately $1.1 billion in revenues), the projected 2015 decline is also in the -1% to 0% range.

-- Wireless revenue grows in the 2%-3% range in 2015, and then in the 3%-4% range thereafter. Revenue is assumed to grow a bit faster in 2016, as the effects of postpaid customers adopting certain shared plans are behind the company.

-- Wireline EBITDA margins are in the 27%-28% range in 2015 but improve thereafter as synergies from DIRECTV are realized.

-- Wireless EBITDA margins are in the 36%-38% range, with the higher end of the range assumed in the latter years of the forecast as growth slows.

-- DIRECTV revenue growth is in the 4%-5% range and its EBITDA margins are in the 25%-27% range, improving to the high end over time as synergies are realized.

-- There are no stock repurchases in the forecast as the company is focused on a three-year period of debt reduction.

-- Capital spending approximates 15% of service revenues.

-- In 2015, Fitch expects consolidated capital spending to be in line with company guidance of $21 billion, slightly lower than the $21.4 billion spent in 2014. Included in the $21 billion forecast is approximately $1 billion of capitalized interest, whereas in 2014 capitalized interest was $234 million. Recently, AT&T completed wireless and wireline initiatives focused on its 4G LTE and IP broadband networks, respectively, leading to a moderation of spending going forward.

--Potential spending in the FCC's 600 MHz TV broadcast auction, currently anticipated to occur in early 2016, is not included in Fitch's assumptions and will be an event-driven consideration.

RATING SENSITIVITIES

Positive Rating Action: Fitch believes a positive rating action is unlikely for AT&T in the foreseeable future, given the leverage incurred primarily through the DIRECTV acquisition and spending on spectrum.

Negative Rating Action: Fitch may take negative rating action if operating performance causes delevering to take place at a materially slower than anticipated pace, either alone or in combination with material debt-financed acquisitions. Discretionary management moves that cause leverage to rise above 2.5x, such as another material acquisition or stock repurchases, could lead to a negative action in the absence of a strong commitment to delever.

LIQUIDITY

Strong Liquidity Profile: At June 30, 2015, the company did not have any drawings on either its $5 billion revolving credit facility (RCF) due 2018 or its $3 billion RCF due 2017. The principal financial covenant for all facilities requires debt-to-EBITDA, as defined, to be no more than 3x. At June 30, 2015, the company's cash and cash equivalents totalled $21 billion of which $14.4 billion was used to complete the DIRECTV acquisition. On a pro forma basis, at June 30, 2015, AT&T had $11.6 billion of cash (reflects the addition of DIRECTV's $5 billion of cash less the amount paid to complete the transaction).

For 2015, FCF after dividends is expected to be in the range of $2 billion-$3 billion, including DIRECTV for part of the year. Fitch believes the acquisition of DIRECTV will improve AT&T's financial flexibility owing to DIRECTV's strong FCF of more than $3 billion annually.

At June 30, 2015, actual total debt outstanding was approximately $113.7 billion; pro forma for the DIRECTV acquisition, AT&T had $133.2 billion in gross debt. In August 2015, AT&T disclosed that in September 2015 it would retire certain 2015 and 2016 debt issues, as well as repay $1 billion outstanding on the $2 billion term loan. The total September 2015 debt repayment is approximately $5.25 billion.

Debt Maturities: Relative to the company's cash, RCF availability, and modest expected FCF, Fitch believes upcoming debt maturities are manageable. Debt maturities are nominal for the remainder of 2015, as $1.75 billion was repaid upon maturity in July and August 2015, and $1 billion due in December was early redeemed in September. In 2016, approximately $7.3 billion matures, including $1.8 billion putable to AT&T.

Fitch has affirmed the following ratings with a Stable Outlook:

AT&T, Inc.

--Long-term IDR at 'A-';

--Senior unsecured debt at 'A-';

--$5 billion revolving credit facility due December 2018 at 'A-';

--$3 billion revolving credit facility due December 2017 at 'A-';

--$6.286 billion Tranche A three-year term loan facility at 'A-';

--$2.869 billion Tranche B five-year term loan facility at 'A-';

--$1 billion 18-month term loan due September 2016 facility at 'A-';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

AT&T Corp.

--Long-term IDR at 'A-';

--Senior unsecured at 'A-'.

DIRECTV Holdings LLC

--Long-term IDR 'A-';

--Senior unsecured notes 'A-'.

BellSouth Corp.

--Long-term IDR at 'A-';

--Senior unsecured at 'A-'.

BellSouth Capital Funding Corp.

--Senior unsecured at 'A-'.

BellSouth Telecommunications, Inc.

--IDR at 'A-';

--Senior unsecured at 'A-'.

AT&T Mobility LLC (formerly Cingular Wireless, LLC)

--Long-term IDR at 'A-';

--Senior unsecured at 'A-'.

New Cingular Wireless Services, LLC (formerly AT&T Wireless Services, Inc.)

--Long-term IDR at 'A-';

--Senior unsecured at 'A-'.

Ameritech Capital Funding Corp.

--Long-term IDR at 'A-';

--Senior unsecured at 'A-'.

Indiana Bell Telephone Company

--Long-term IDR at 'A-';

--Senior unsecured at 'A-'.

Michigan Bell Telephone Company

--Long-term IDR at 'A-';

--Senior unsecured at 'A-'.

Pacific Bell Telephone Company

--Long-term IDR at 'A-';

--Senior unsecured at 'A-'.

Wisconsin Bell Telephone Company

--Long-term IDR at 'A-';

--Senior unsecured at 'A-'.

Southwestern Bell Telephone Company

--Long-term IDR at 'A-';

--Senior unsecured at 'A-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991495

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991495

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
John C. Culver, CFA
Senior Director
+1-312-368-3216
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
or
Committee Chairperson
Jack Kranefuss
Senior Director
+1-212-908-0791
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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