CHICAGO--(BUSINESS WIRE)--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's expectations).
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 billion 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 dividends).
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 material transaction;
--Fitch believes management has weakened its commitment to returning to, or operating longer-term with, leverage at a level more reflective of the rating.
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).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Telecom Companies