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

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings rates AT&T Inc.'s (AT&T; NYSE: T) senior unsecured notes 'A-'. The notes, under several series, are being issued under the same terms as previous AT&T notes. The additional 2019 notes are offered under the same terms as the $1.1 billion 2.3% senior unsecured notes due 2019 issued in March 2014. The additional 2021 notes are offered under the same terms as the $1.25 billion 2.8% senior unsecured notes due 2021 issued in February 2016. The additional 2023 notes are offered under the same terms as the $1.5 billion 3.6% senior unsecured notes due 2023 issued in February 2016. The additional 2026 notes are offered under the same terms as the $1.75 billion 4.125% senior unsecured notes due 2026 issued in February 2016. Finally, the additional 2044 notes are offered under the same terms as the $2 billion 4.8% senior unsecured notes due 2044 issued in June 2014.

Proceeds will be used to pay down amounts outstanding on AT&T's $9.155 billion credit agreement. Amounts outstanding under the tranche A portion of the facility total $6.286 billion and are due March 2018, while amounts outstanding under the tranche B portion of the facility total $2.869 billion and begin amortizing in March 2018, with 25% payable before the final due date in March 2020. AT&T's Long-Term Issuer Default Rating (IDR) is 'A-'. The Rating Outlook is Stable.

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: AT&T intends 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. This and other transactions caused 2015 pro forma net core telecom leverage (which excludes securitized equipment installment receivable debt) to rise to approximately 2.3x from 1.8x at year-end 2014. After 2015, Fitch believes core telecom 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 auction, 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, which started 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.

Capital Spending: 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.

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.

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

--Potential spending in the FCC's 600 MHz TV broadcast auction, which started in March 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.

Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:

--Securitized equipment installment receivables are not included in core telecom leverage and are included in off-balanced sheet debt.

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 March 31, 2016 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 March 31, 2016, the company's reported cash and cash equivalents totalled $10 billion.

At March 31, 2016, reported total debt outstanding was approximately $130.5 billion

Debt Maturities: Relative to the company's cash, RCF availability, and modest expected FCF, Fitch believes upcoming debt maturities are manageable. In the remainder of 2016, approximately $5.6 billion matures, including $1.8 billion of putable debt that was not put.

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

Additional information is available on www.fitchratings.com.

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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
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
[email protected]

Source: Fitch Ratings

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