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Fitch Rates AT&T's Sr Unsecured Notes Offering 'A'; Remains on Negative Watch
[January 29, 2015]

Fitch Rates AT&T's Sr Unsecured Notes Offering 'A'; Remains on Negative Watch


Fitch Ratings has assigned an 'A' rating to AT&T (News - Alert) Inc.'s (AT&T) debt issue in Taiwan. AT&T's Issuer Default rating (IDR) is 'A'. The company's IDR and debt securities remain on Rating Watch Negative, where they were placed on May 19 upon the announcement of the acquisition of DIRECTV. DIRECTV's wholly-owned indirect subsidiary, DIRECTV Holdings LLC, has an IDR of 'BBB-'.

Proceeds from this offering are expected to be used for general corporate purposes, including acquisition related payments.

KEY RATING DRIVERS

Fitch believes AT&T's acquisition of DIRECTV will improve its financial flexibility owing to DIRECTV's strong free cash flows (FCF) and the significant equity component in the transaction financing. The addition of DIRECTV will also strengthen AT&T's position in the evolving video landscape, offering the potential to capitalize on trends for mobile video and over-the-top (OTT) video delivery. Other benefits include the scale brought by DIRECTV's substantially larger video subscriber base and the diversification of AT&T's revenue stream.

DIRECTV's video assets are complementary to AT&T's operations, but the longer term strategic benefits are less clear and depend on the post-merger company's ability to capitalize on emerging trends in the industry. The acquisition is expected to be completed in the first half of 2015, following the necessary regulatory approvals.

The Negative Watch reflects the modest increase in leverage for AT&T, pro forma for the transaction. Currently, AT&T operates with leverage at the upper bounds for the current 'A' rating. As currently proposed the transaction would likely lead to a one-notch downgrade for AT&T to 'A-' and a Stable Outlook. However, Fitch anticipates that the potential funding for spectrum acquired in the Federal Communications Commission's AWS-3 auction, once disclosed, may lead to a rating action prior to the close of the DIRECTV transaction.

For 2014, AT&T's net leverage as calculated by Fitch approximated 1.8x, an increase from the 1.7x at year-end 2013. EBITDA has been under some pressure due to wireless subscribers converting to no-device subsidy plans, which provide for discounted service on the company's data sharing plans. Other factors contributing to EBITDA pressure include rising content costs for its U-verse video services, and expenses related to the March 2014 Leap Wireless (News - Alert) acquisition and the pending DIRECTV transaction.

In Fitch's view, AT&T's liquidity remains solid and supported the company's cash and availability on its existing revolving credit facilities (RCFs). At Dec. 31, 2014, cash and cash equivalents amounted to $8.6 billion. In addition, AT&T also had approximately $1.9 billion of highly liquid certificates of deposit and time deposits available to support liquidity needs.



The company did not have any drawings on either its $5 billion RCF due 2018 or its $3 billion RCF due 2017, and recently entered into $11.155 billion in term loan facilities which it has yet to draw on. The principal financial covenant for all facilities, other than a new 18-month facility, requires debt-to-EBITDA as defined to be no more than 3x.

For 2014, FCF (net cash provided by operating activities less capital expenditures and dividends) was modestly positive at $353 million, and capital spending was $21.4 billion.


Recently, AT&T completed wireless and wireline initiatives focused on its 4G LTE (News - Alert) and IP broadband networks, respectively, leading to a moderation of spending going forward. Following the completion of these initiatives, AT&T has indicated 2015 capital spending will approximate $18 billion.

At Dec. 31, 2014, total debt outstanding was approximately $82.1 billion. Relative to the company's cash, RCF availability, and modest expected FCF, Fitch believes upcoming debt maturities are manageable. Debt maturities are approximately $6.5 billion in 2015 and include approximately $1.7 billion of debt putable to the company on an annual basis that Fitch believes is unlikely to be put.

RATING SENSITIVITIES

Negative: The transaction as it currently stands, plus the additional investments in Mexico in 2015, will likely lead to a one-notch downgrade of AT&T's rating to 'A-'. Spectrum (News - Alert) spending, which is currently unknown, may have a further impact on the Outlook or rating depending on AT&T's financial policies.

Positive: Although Fitch views this scenario as unlikely within its rating horizon, the rating could be affirmed at 'A' if the company's financial policies targeted leverage of 1.6x to 1.7x by 2016.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Telecommunications - Rating Navigator Companion' (Nov. 17, 2014).

Applicable Criteria and Related Research:

Telecommunications: Ratings Navigator Companion

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809869

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978839

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