CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to Verizon Communications Inc.'s (NYSE: VZ) proposed multi-tranche senior unsecured note offering. VZ's Issuer Default Ratings (IDR) is 'A-' and the Rating Outlook is Stable.
Proceeds from the offering will be used to partly fund the cash portion of VZ's proposed $130 billion acquisition of Vodafone Group, PLC's (Vodafone) 45% interest in Cellco Partnership (which does business as Verizon Wireless [VZW]). VZ is expected to raise a significant portion of the permanent financing for the cash portion of the transaction prior to its close. Proceeds raised in this offering will be used to reduce the size of the $61 billion senior unsecured bridge facility put in place to fund the cash portion of the transaction and for related fees and expenses.
The transaction is expected to close in the first quarter 2014 after shareholder and customary regulatory approvals.
KEY RATING DRIVERS
--The acquisition pressures VZ's near-term credit metrics, pushing pro forma leverage at closing to approximately 2.8x. Subsequent to the close of the acquisition, Fitch expects VZ to reduce debt. 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 a 'A-' rating.
--Fitch is cognizant that leverage will be outside an appropriate range for an 'A-' rating for several years. However, Fitch believes 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, provide support for limiting the downgrade to one notch. 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 execution risk.
--A key to debt reduction over the next several years will be the continued generation of strong free cash flow (FCF) at VZW. VZW's simple FCF (EBITDA less capital spending) over the latest 12 months (LTM) ending June 30, 2013 was approximately $22.6 billion. Fitch estimates VZ's consolidated FCF, which Fitch estimates will be in a $14 billion to $15 billion range for 2013, could be reduced by approximately 60% on a pro forma basis as a result of transaction-related interest costs, higher dividend requirements due to the shares issued to Vodafone equity holders and higher cash taxes related to the increased ownership stake in VZW.
--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. is key to the cash flow stability of VZ and the longer rating horizon used in this action.
Once completed, VZ will own Verizon Wireless in its entirety. The terms of the transaction call for VZ to pay $58.9 billion in cash, to issue $60.2 billion in common equity, to issue $5 billion in notes payable to Vodafone, and to sell its 23.1% stake in Vodafone Omnitel N.V. to Vodafone for $3.5 billion. The balance of the transaction consists of $2.5 billion of other consideration.
VZ's gross leverage for the LTM ending June 30, 2013 was approximately 1.25x. Consolidated cash balances declined to $1.8 billion on June 30, 2013 from $3.1 billion at Dec. 31, 2012. In June 2013, a total of $7 billion in distributions were paid by VZW to its partners in proportion to their ownership interests. In 2012, approximately $8.3 billion of VZW's dividends were paid to Vodafone, with the remaining $10.2 billion retained by VZ.
The $61 billion bridge 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.
At June 30, 2013, VZ had $49.8 billion in debt on a consolidated basis. VZ's commercial paper (CP) issuances 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 was recently 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. On a consolidated basis, VZ and its subsidiaries have scheduled debt maturities of approximately $1.75 billion and $6.75 billion in 2013 and 2014, respectively.
For the LTM ended June 30, 2013, FCF after dividends and capital spending (but prior to the VZW distributions to Vodafone) was approximately $11.4 billion. In 2013, Fitch expects VZ's FCF (after capital spending and dividends but prior to any financing related to the acquisition of Vodafone's 45% stake) to be in the $14 billion to $15 billion range, an increase from the $10.1 billion generated in 2012. FCF in 2012 was impacted by $3.7 billion in pension contributions, including $2.6 billion contributed in the last four months of the year in connection with the pension annuitization transaction.
In 2013, Fitch expects consolidated capital spending to range from $16.4 billion to $16.6 billion, slightly above 2012 levels, when spending totaled approximately $16.2 billion. Following second quarter 2013 results, VZ revised expectations upward by $200 million to $400 million to reflect higher wireless capital spending. Strong demand for 4G LTE capacity due to an increase in connections and the success of its data sharing plans has spurred the increase in capital spending.
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).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Telecom Companies