Fitch Ratings has assigned an 'A' rating to Verizon Communications,
Inc.'s (Verizon) (NYSE: VZ) proposed three tranche offering of $4.5
billion of senior unsecured notes. The proceeds will be used to retire
prior to maturity all or a portion of $1.75 billion of debt due in 2013,
$2 billion of debt due in 2018 and to fund a tender offer, contingent
upon completing the offering, for any or all of the $1.25 billion 8.95%
senior unsecured notes due in 2039. Remaining proceeds may be used for
general corporate purposes. The Rating Outlook is Stable.
VZ's ratings are supported by strong free cash flows (FCF) which, in
turn, provide the company flexibility with respect to operating within
its target leverage range of 1.3 times (x)-1.4x. This leverage range is
conservative relative to Fitch's expectations of around 1.5x for the
category. Additional supporting factors include the significant scale
and scope of the company's domestic wireline and wireless businesses and
the high proportion of revenues from wireless and wireline growth areas.
An important component of VZ's ratings is the expectation for continued
relatively strong growth in Verizon Wireless' (VZW) revenue, EBITDA, and
FCF. In the first nine months of 2012, the domestic wireless segment
produced approximately 65% of total consolidated revenues.
Gross leverage for the last 12 months (LTM) ending Sept. 30, 2012 was
1.4x. Consolidated cash balances declined from $13.4 billion at the end
of 2011 to $9.7 billion at Sept. 30, 2012 as VZW paid a $10 billion
dividend in January, of which $4.5 billion was to VZW's 45% owner,
Vodafone Group Plc. The support for the distribution is provided by
VZW's strong FCF generation. Over the LTM ending Sept. 30, 2012, VZW's
simple FCF (EBITDA less capital spending) was approximately $21.5
The ratings also incorporate Verizon's recently disclosed plans to
contribute $3.4 billion to its pension plans in 2012, $2.1 billion
higher than the company estimated at the beginning of 2012. The new 2012
contribution amount funds the transfer of the company's management
pension plan to Prudential Insurance Company of America as well as
maintains the existing funding percentage with the pension plans that
remain the obligation of Verizon. Through the first nine months of 2012,
Verizon contributed $1.8 billion to its pension plans and expects to
contribute $1.6 billion to the plans during the fourth quarter of 2012.
Concerns include the ongoing competitive pressures in the residential
wireline market from wireless substitution and cable telephony
competition, and the effect of the slow economic recovery on revenues
from business and residential customers.
There is event risk regarding VZ's potential acquisition of Vodafone 45%
interest in VZW, asthere would be concerns with regard to its initial
outlay and financing. At the current time, the companies are strongly
committed to the partnership, particularly given the distribution in
early 2012 and expected strong cash flows that would support potential
At Sept. 30, 2012, VZ had $52.8 billion in debt on a consolidated basis.
Of this amount, $6.3 billion matures within one year, or $4.3 billion
pro forma for the make-whole call. VZ's commercial paper (CP) issuances
approximated $2.3 billion and are backed by a $6.2 billion credit
facility, and Fitch expects the company to maintain aggregate CP
balances within a level fully backed by the facility. The credit
facility has no ratings triggers or other restrictive covenants, such as
leverage or interest coverage tests. The three-year facility matures in
August 2016. After the effect of letters of credit (LOCs), approximately
$6.1 billion is available on the facility. On a consolidated basis, VZ
and its subsidiaries have scheduled debt maturities of approximately
$100 million and $5.4 billion in 2012 and 2013, respectively.
In the LTM ending Sept. 30, 2012, FCF after dividends and capital
spending (but prior to the VZW distribution to Vodafone) was
approximately $12.7 billion. In 2012, Fitch expects VZ's FCF (after
capital spending, pension contributions and dividends but prior to
distributions to Vodafone and the acquisition of wireless spectrum) to
be in a $10.5 billion to $11.5 billion range, an increase from the $8
billion generated in 2011. Fitch believes that as FCF continues to grow,
and in the absence of other investment alternatives, the company will
have the flexibility to consider stock repurchases within the context of
maintaining leverage within its 1.3x-1.4x target range.
In 2012, Fitch expects consolidated capital spending to be down slightly
relative to 2011 levels, when spending totaled approximately $16.2
billion. VZ has not provided capital spending guidance by business
segment for 2012. In 2012, key areas of capital spending will consist of
the continued buildout of advanced networks, including the 4G wireless
network and FiOS, well as core network spending on IP and data center
What Could Trigger A Rating Action
A positive rating action could occur if:
--Fitch believes a positive rating action is unlikely, given the
industry's business and technological risks.
A negative rating action could occur if:
--The rating could be negatively affected by heightened wireless
competition. Fitch believes there is a relatively low probability that
VZW's competitive position will become weaker than the wireless industry
as a whole.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).
Corporate Rating Methodology
Rating Telecom Companies
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