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 up to 21 series of existing senior unsecured notes previously issued by AT&T and certain operating subsidiaries for new notes and cash.

The first pool of nine series existing notes will be exchanged for up to $2.5 billion principal amount of new notes due 2048, and the second pool of 12 existing notes will be exchanged for up to $2.5 billion of new notes due 2049. For either maturity, if less than $500 million of new notes would be issued, then the respective tenders for the corresponding pool will be cancelled and no new notes issued.

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.

Broadcast TV Spectrum Auction: Potential spending in the FCC's 600 MHz TV broadcast auction, which started in March 2016 or 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.

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: In 2015, debt levels also increased due to the acquisition of spectrum in the Federal Communications Commission's (FCC) AWS-3 spectrum auction. 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.

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.

--Fitch has assumed there are no stock repurchases through 2018given the company's near-term focus on 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 billion to $6 billion.

--Fitch's assumptions do not include potential spending in the FCC's 600 MHz TV broadcast auction or for potential spending on the FirstNet nationwide public safety broadband network, should AT&T be successful in winning the contract.

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 June 30, 2016 the company did not have any drawings on its revolving credit facility (RCF). AT&T entered into a new, five-year $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 net debt-to-consolidated EBITDA, as defined, to be no more than 3.5x. At June 30, 2016, the company's reported cash and cash equivalents totalled $7.2 billion of which $600 million resides in foreign jurisdictions.

At June 30, 2016, reported total debt outstanding was approximately $126.8 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 $1.5 billion of long-term debt matures. In 2017, approximately $9.5 billion of long-term debt matures, including $1.8 billion of putable debt.

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

Additional information is available on www.fitchratings.com.

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.

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=1010054

Endorsement Policy

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

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160805005741/en/

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:
Elizabeth Fogerty, +1-212-908-0526
[email protected]
Hannah James, + 1-646-582-4947
[email protected]

Source: Fitch Ratings

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