Fitch Ratings has assigned an 'A-' rating to Verizon Communications
Inc.'s (NYSE: VZ) proposed senior unsecured notes due 2054. VZ's Issuer
Default Rating (IDR) is 'A-' and the Rating Outlook is Stable.
Proceeds from the offering will to be used for general corporate
KEY RATING DRIVERS
--In February 2014, VZ's proposed $130 billion acquisition of Vodafone
Group, PLC's (Vodafone) 45% interest in Cellco Partnership (which does
business as Verizon Wireless) is expected to close. Shareholders of both
companies have approved the transaction. The transaction remains subject
to the approval of the High Court of Justice of England and Wales, and
other closing conditions.
--The acquisition pressures VZ's near-term credit metrics, pushing pro
forma leverage at closing to approximately 2.7x. Subsequent to the close
of the acquisition, Fitch expects VZ to materially reduce debt over the
next few years. EBITDA growth, combined with debt reductions are
expected to reduce leverage to approximately 2x by the end of 2016,
which Fitch believes is appropriate for an 'A-' rating.
--Fitch is cognizant that leverage will be outside an appropriate range
for an 'A-' rating for several years. However, Fitch has a high level of
confidence metrics will return to a level appropriate for the rating due
to the company's strong position in the wireless industry and the
significant cash flows generated by the wireless business, in
combination with management's commitment to delever. Management's
commitment to delevering has been shown in the past by the aggressive
delevering following the acquisition of Alltel Corporation in early
2009. Other supporting factors include the absence of operations-related
--A key to debt reduction over the next several years will be the
continued generation of strong FCF at Verizon Wireless (VZW). VZW's
simple FCF (EBITDA less capital spending) in 2013 was approximately
$24.8 billion. VZ's consolidated FCF (after dividends and capital
spending but before distributions to Vodafone) was $16.3 billion in
2013, and Fitch estimates FCF will be at least 50% lower in 2014 as a
result of transaction-related interest costs, higher dividend
requirements due to the shares issued to Vodafone equity holders and
higher cash taxes.
--The strong competitive position of VZW as evidenced through industry
low churn rates, high margins and the most developed LTE network in the
U.S. support expectations for VZ's cash flow stability of VZ and the
longer rating horizon embodied in the rating.
VZ's gross leverage at yearend 2013 was 2.2x, with total debt at $93.6
billion. Consolidated cash balances of $53.5 billion on Dec. 31, 2013
include proceeds from the $49 billion of debt issued in September 2013
to finance the transaction, and as a result net lverage was only 1.0x.
To finance the remainder of the transaction, VZ will draw on a $12
billion term loan. The term loan's principal financial covenant requires
leverage to be 3.5x or less but falls away upon achieving 'A-' ratings
as defined in the agreement.
VZ's liquidity is supported 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. In August 2013, the facility was extended for a year and
now matures in August 2017. After the effect of letters of credit
(LOCs), approximately $6.1 billion is available on the facility. In
October 2013, VZ entered into a $2 billion 364-day revolving credit
facility, which may be drawn upon after the wireless transaction closes.
The 364-day facility has a 3.5x leverage covenant. On a consolidated
basis, VZ and its subsidiaries have scheduled debt maturities of
approximately $3.2 billion and $2.6 billion in 2014 and 2015,
In 2014, Fitch expects consolidated capital spending to range from $16.5
billion to $17 billion, comparable to or slightly higher than the $16.6
billion spent in 2013. Investment in the wireless network continues to
be an area of emphasis due to the strong demand for 4G LTE capacity for
rapidly growing data services.
A positive rating action could occur if:
--Fitch believes a positive rating action is unlikely in the foreseeable
future, given the leverage incurred in the Vodafone transaction.
A negative rating action could occur if:
--Operating performance causes delevering to take place at a materially
slower than anticipated pace.
--A weakening of VZW's competitive position that would jeopardize the
stability of cash flows.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August
Rating Telecom Companies
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