S&P Lowers Outlook on AT&T (T) to Negative

Standard & Poor's Ratings Services today said it revised its ratings outlook on Dallas-based AT&T Inc. (NYSE: T) to negative from stable. At the same time, we affirmed the 'A-' corporate credit rating and 'A-2' short-term rating on the company.

"The outlook revision to negative primarily reflects our expectation for slowing growth in the mature U.S. wireless market, coupled with our view that AT&T will continue to pursue growth initiatives outside the U.S.," said Standard & Poor's credit analyst Allyn Arden.

The following factors support this view:

• During the third quarter of 2014, AT&T lowered its 2014 revenue guidance to 3%-4% from 5%, partially due to fewer people signing up for equipment installment plans (EIPs) than it previously expected, which is particularly important since handset revenue from EIP customers is booked at the point of sale and contributes to higher near-term revenue than under the subsidy model. We believe this highlights the competitive challenges that AT&T faces and that its prior guidance of 5% was partially inflated by the near-term impact of customers migrating to EIP rather than industry and company-specific fundamentals. Moreover, we believe that the U.S. wireless industry will face increased priced-based competition because of maturing market conditions and the presence of four nationwide carriers .
• The company's announcement that it agreed to purchase Mexico-based wireless provider Iusacell in a transaction valued at $2.5 billion, including the assumption of Iusacell debt. While we do not expect the transaction to have a material impact on AT&T's credit metrics given that the purchase price is essentially offset by the expected reduction in capital expenditures in 2015, we believe the transaction reflects AT&T's pursuit of growth initiatives outside the U.S., which could lead to additional investments and acquisitions that weaken credit metrics over the intermediate term.

The outlook is negative. Under our base case forecast, we expect growth in wireless to slow coupled with still-weak operating performance and margins in the wireline segment, leading to leverage in the high-2x area over the intermediate term. As a result, AT&T does not have a great degree of headroom within the current rating, and any intensifying competitive pressure or additional debt-financed acquisitions could pressure the ratings.

We could lower the rating if wireless industry conditions deteriorate, resulting in greater-than-expected pricing pressure and margin compression, or if the company experiences execution missteps during the integration of DTV and Iusacell such that leverage rises above 3x on a sustained basis. We could also lower the ratings if AT&T were to make additional significant debt-financed acquisitions or if spectrum purchases materially exceed our current base-case scenario, especially after factoring in the company's high dividend payment, which limits the amount of discretionary cash flow that can be used for debt reduction.

We could revise the outlook back to stable if recent investments from project VIP enable sustained revenue growth and margin improvement in both wireless and wireline such that leverage remains around 2.75x or less on a sustained basis. An outlook revision to stable would also require greater confidence that the company is unlikely to pursue larger acquisitions in Mexico or other foreign markets.

You May Also Be Interested In

• Morgan Stanley Upgrades DNB ASA (DNB:NO) (DNHBY) to Equalweight
• Z AI Co Ltd (2513:HK) PT Raised to HK$1,500 at Bernstein SocGen Group
• AT&T to Release Third-Quarter 2026 Earnings on Oct. 21