Fitch Ratings has assigned an 'A' rating to AT&T Inc.'s (AT&T) new,
five-year $3 billion revolving credit agreement. The facility will
terminate on Dec. 11, 2017. The agreement replaces an expiring $3
billion 364-day credit facility dated Dec. 19, 2011. The company has
also extended the term of its existing $5 billion facility by one year
to Dec. 11, 2016. The Rating Outlook is Negative.
The current 'A' rating is supported by AT&T's financial flexibility, the
company's diversified revenue mix, its significant size and economies of
scale as the largest telecommunications operator in the U.S., and
Fitch's expectation that AT&T will benefit from continued growth in
wireless operating cash flows.
The Negative Outlook reflects Fitch's expectation that AT&T's net
leverage is likely to move up to its recently disclosed 1.8x upper
boundary for leverage, which represents a notable increase from the
1.47x at the end of the third quarter of 2012 on a last 12-month (LTM)
basis. The increased leverage is expected to arise from the combined
effects of a moderate increase in wireless and wireline capital spending
and the continuation of the company's share repurchase program as
announced in early November 2012. Prospective leverage expectations are
subject to uncertainty caused by the rate of stock repurchases, actual
capital expenditure levels, possible acquisitions (such as longer-term
spectrum needs) and asset divestitures (of which there are none in
Fitch believes increased capital spending will strengthen the company's
competitive position and is a positive rating factor. Over the next
three years, Fitch believes capital spending will increase about 10%-12%
over prior baseline levels to $22 billion annually and then revert to
mid-teen historical levels as a percent of revenues. The investment
program will expand the population covered by AT&T's 4G LTE network by
approximately 20% to 300 million, and enable the company to provide
higher broadband speeds over its wireline network in more rural areas.
By comparison, the company's original capital spending guidance for 2012
was about $20 billion, although the company reduced guidance to the low
end of a $19 billion to $20 billion range in October 2012.
In early 2012, AT&T started repurchasing common stock under a December
2010 authorization (the company did not repurchase stock while the
T-Mobile USA transaction was under consideration in 2011). Through the
first nine months of 2012, AT&T's strong free cash flow (FCF) and
operating results have enabled the company to maintain its net leverage
metric at around 1.5x even while repurchasing nearly $9 billion of
common stock. Fitch expects FCF to decline from the $8 billin to $9
billion expected in 2012 to $4 billion annually, on average, over the
next three years.
For 2012, Fitch expects AT&T's leverage to be flat with 2011, when gross
leverage was 1.56x as adjusted for non-recurring items and the actuarial
losses on its benefit plans. After 2012, AT&T's continuation of stock
repurchases requiring some borrowing as repurchases will be above FCF
levels, will push leverage up over time, with net leverage expected to
peak near a 1.8x upper boundary in 2014. Thereafter, leverage is
expected to decline over time.
In Fitch's view, liquidity is strong and provided by the company's FCF;
additional financial flexibility is provided by availability on the
company's revolving credit facilities. At Sept. 30, 2012, total debt
outstanding was approximately $63.7 billion, a moderate decline from the
$64.8 billion outstanding at the end of 2011. Of the total, $3.4 billion
consists of debt due within one year, including debt that can be put to
the company. At Sept. 30, 2012, cash amounted to $2.2 billion, and for
the LTM ending Sept. 30, 2012, AT&T produced $7 billion in FCF (net cash
provided by operating activities less capital expenditures and
At end of the third quarter of 2012, the company did not have any
drawings on its revolving credit facilities. The principal financial
covenant for the 2016 and 2017 facilities requires debt to EBITDA, as
defined, to be no more than 3x.
Relative to the company's expected free cash flows, upcoming debt
maturities are manageable. There are no material debt maturities
remaining in 2012. In 2013, debt maturities approximate $3.4 billion,
including approximately $1.6 billion in debt that may be put to the
company. Maturities amount to $3.8 billion in 2014.
WHAT COULD TRIGGER A RATING ACTION
The Rating Outlook could be revised to Stable if:
--The company steadily manages net leverage down from Fitch's expected
peak just under 1.8x in 2014;
--Fitch believes leverage will not reach peak levels as a result of the
outcome of the following factors, including, but not limited to,
stronger operating results, lower capital spending, and the effect of
any acquisitions or divestitures that may occur.
A negative rating action could occur if:
--Net leverage remains above (or is expected to remain above) the 1.8x
level for several quarters, including expected leverage resulting from a
--Fitch believes management has weakened its commitment to returning to,
or operating longer-term with, leverage at a level more reflective of
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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