Fitch Rates AT&T's Exchange Offering 'A-'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A-' rating to AT&T Inc.'s (AT&T; NYSE: T) senior unsecured exchange notes. AT&T commenced an offer to exchange sixteen series of existing senior unsecured notes previously issued by DIRECTV Holdings LLC (DTVH) for the new AT&T notes. The new AT&T notes will have identical terms (interest rate, maturity, interest payment dates and optional redemption prices) as the tendered DTVH notes. In addition, the new AT&T notes will rank pari passu with AT&T's existing senior unsecured debt.

In connection with the exchange, AT&T also is soliciting consent from holders of the DTVH notes to eliminate substantially all of the restrictive covenants in the DTVH indentures, eliminate certain Events of Default and eliminate the change of control and ratings decline covenant. If adopted, these amendments will cause the DTVH notes to have less restrictive terms and reduced protections relative to the current DTVH notes or the AT&T notes. In particular, the holders of DTVH notes will no longer receive annual, quarterly or other reports.

AT&T's Issuer Default Rating (IDR) is currently 'A-', and the Rating Outlook is Stable. Should any DTVH notes remain outstanding after the tender offer, the DTVH IDR and senior unsecured debt ratings will remain unchanged at 'A-'.

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) 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 delever 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. The DIRECTV and other 2015 transactions (discussed below) caused 2015 pro forma net leverage to rise to approximately 2.3x from 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, 2015 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 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, anticipated to begin in March 2016 or potential participation in the Request for Proposals (RFP) process for the FirstNet nationwide public safety broadband network, is not included in Fitch's assumptions and will be an event driven consideration.

KEY ASSUMPTIONS

--Consolidated revenues rise in the low- to mid-teens in 2016 primarily due to the full year effect of DIRECTV's results in operations. Thereafter, Fitch estimates revenue increases will be in the low single digits approximating Fitch's estimates for GDP growth. EBITDA margins are forecast to be in the low 30% range during the forecast period.

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

--In 2016, Fitch expects consolidated capital spending to be in line with company guidance of $22 billion, slightly higher than the $20 billion spent in 2015 (total capital investment was $20.7 billion in 2015 inclusive of $700 million invested in Mexico under a vendor financing arrangement). Included in the $22 billion forecast is approximately $1 billion of capitalized interest. For the longer term, Fitch estimates capital spending will approximate 15% of service revenues.

--Potential spending in the FCC's 600 MHz TV broadcast auction, currently anticipated to occur in early 2016 or potential participation in the RFP process for the FirstNet nationwide public safety broadband network, 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 a 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 Dec. 31, 2015 the company did not have any drawings on its revolving credit facility (RCF). AT&T entered into a new $12 billion RCF in December 2015, replacing a $5 billion RCF due 2018 and a $3 billion RCF due 2017. The principal financial covenant for the RCF requires debt-to-EBITDA, as defined, to be no more than 3.5x. At Dec. 31, 2015, the company's cash and cash equivalents totalled $5.1 billion.

For 2016, Fitch estimates FCF after dividends is expected to be in the range of $4 billion -- $6 billion, including DIRECTV.

At Dec. 31, 2015, actual total debt outstanding was approximately $126.2 billion.

Debt Maturities: Relative to the company's cash, RCF availability, and modest expected FCF, Fitch believes upcoming debt maturities are manageable. In 2016, approximately $7.3 billion matures, including $1.8 billion putable to AT&T.

Date of Relevant Rating Committee: Sept. 28, 2015.

Additional information is available on 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

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999743

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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