Fitch Rates Cricket 2020 Notes 'A' on AT&T Guarantee; Outlook Negative

CHICAGO--()--Fitch Ratings has assigned an 'A' rating to Cricket Communications Inc.'s (Cricket) $1.6 billion of outstanding senior unsecured 7.75% notes due 2020. The rating is based on the senior unsecured guarantee provided by AT&T Inc., which has an Issuer Default rating (IDR) and senior unsecured debt rating of 'A'. Cricket, a wholly-owned subsidiary of Leap Wireless International, Inc. (Leap), became an indirect subsidiary of AT&T when the latter completed its acquisition of Leap. AT&T's Rating Outlook is Negative.

Subsequent to the acquisition, AT&T issued a make whole call on the 2020 notes, and they will be repaid 30 days after the call. AT&T has repaid Leap's outstanding term loans (approximately $1.8 billion on Dec. 31, 2013). Fitch does not rate Leap's 2014 convertible senior notes ($248 million outstanding on Dec. 31, 2013).

KEY RATING DRIVERS

The 'A' rating assigned to AT&T is supported by its diversified revenue mix, its significant size and economies of scale as the largest telecommunications operator in the U.S., healthy free cash flows (FCFs), 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 approach 1.8x (Fitch's upper boundary for the current rating) in 2014 before declining. Leverage has trended higher, as a temporary, growth-focused wireless and wireline capital spending program announced in late 2012, combined with a share repurchase program in excess of FCFs caused debt to rise. Following a peak in share repurchases in the first quarter of 2013, repurchases have continued at a lower level. Modestly growing EBITDA is softening the effect of the rise in debt on leverage.

In addition to aggressive wireless capital spending, AT&T is strengthening this segment through acquisitions while monetizing assets in noncore areas across the company. Not only has AT&T acquired spectrum to meet growing capacity needs, the close of the $4 billion Leap acquisition will add to AT&T's spectrum position and boost its prepaid wireless business. Significant asset sales include the expected second half of 2014 sale of the Connecticut wireline operations for approximately $2 billion and the year-end 2013 sale of the wireless towers for $4.8 billion.

In Fitch's view, AT&T's liquidity is strong with year-end 2013 cash approximating $3.3 billion. Additional financial flexibility is provided by availability on the company's revolving credit facilities. At Dec. 31, 2013, the company did not have any drawings on either its $5 billion revolving credit facility due 2018 or its $3 billion revolving credit facility due 2017. The principal financial covenant for the two facilities requires debt to EBITDA, as defined, to be no more than 3x.

Liquidity is augmented by FCF (net cash provided by operating activities less capital expenditures and dividends), which totaled $3.9 billion in 2013. Fitch expects FCF to be around $5 billion annually, on average, over the next two years.

At Dec. 31, 2013, total debt outstanding was approximately $74.8 billion, a $4.9 billion rise from levels at the end of 2012. Relative to the company's available liquidity, upcoming debt maturities are manageable. Maturities amount to $5.4 billion and $6.5 billion in 2014 and 2015, respectively, including debt putable to the company.

RATING SENSITIVITIES

The Rating Outlook could be revised to Stable if:

--The company steadily manages net leverage down from Fitch's expected peak of 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 near or above (or is expected to remain near or above) the 1.8x level for several quarters after its peak, 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 'A' rating.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Rating Telecom Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=823903

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Contacts

Fitch Ratings
Primary Analyst
John C. Culver, CFA, +1-312-368-3216
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bill Densmore, +1-312-368-3125
Senior Director
or
Committee Chairperson
David Peterson, +1-312-368-3177
Senior Director
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
John C. Culver, CFA, +1-312-368-3216
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bill Densmore, +1-312-368-3125
Senior Director
or
Committee Chairperson
David Peterson, +1-312-368-3177
Senior Director
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com