Fitch Rates AT&T's Credit Facilities 'A'; Remains on Negative Watch

CHICAGO--()--Fitch Ratings has assigned an 'A' rating to AT&T Inc.'s (AT&T) proposed $9.155 billion senior unsecured credit agreement consisting of a $6.286 billion term loan facility (Tranche A facility) and a $2.869 term loan facility (Tranche B facility). Fitch has also assigned an 'A' rating to AT&T's $2 billion 18-month senior unsecured credit agreement.

The company's Issuer Default Rating (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-'.

The Tranche A facility will mature three years from the funding date, and the Tranche B facility will begin to amortize on the third anniversary of the funding date, with 25% due prior to the maturity at the five year anniversary of the Tranche B funding date.

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. On a pro forma basis, Fitch estimates leverage in 2015 will be less than 2.0x.

Fitch's review of AT&T's rating will also incorporate potential funding needed for spectrum acquired in the Federal Communications Commission's AWS-3 auction.

For the latest 12 months (LTM) ended Sept. 30, 2014, AT&T's net leverage as calculated by Fitch was 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 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 Sept. 30, 2014, cash and cash equivalents amounted to $2.5 billion, and the company did not have any drawings on either its $5 billion RCF due 2018 or its $3 billion RCF due 2017. In addition to cash remaining from approximately $7.1 billion of debt offerings subsequent to the close of the third quarter of 2014, AT&T also has approximately $1.9 billion of highly liquid certificates of deposit and time deposits available to support liquidity needs. The principal financial covenant for all facilities other than the new 18-month facility requires debt-to-EBITDA, as defined, to be no more than 3x.

For 2014, Fitch expects FCF to be modestly positive but less than the $3.9 billion generated in 2013; for the most recent LTM, AT&T had $1.5 billion in FCF (net cash provided by operating activities less capital expenditures and dividends). Capital spending over the LTM was $22.5 billion, about $1.5 billion over the $21 billion expected for 2014.

Recently, AT&T completed wireless and wireline initiatives focused on its 4G LTE 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, down $3 billion from anticipated spending in 2014.

At Sept. 30, 2014, total debt outstanding was approximately $75.6 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. Maturities in 2015 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 will likely lead to a one-notch downgrade of AT&T's rating to 'A-'.

Positive: 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 - Ratings Navigator Companion' (Nov. 17, 2014).

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=749393

Telecommunications: Ratings Navigator Companion

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=976596

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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:
Michael Weaver, +1-312-368-3156
Managing Director
or
Alyssa Castelli, +1-212-908-0540
Media Relations, New York
alyssa.castelli@fitchratings.com
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

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:
Michael Weaver, +1-312-368-3156
Managing Director
or
Alyssa Castelli, +1-212-908-0540
Media Relations, New York
alyssa.castelli@fitchratings.com
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com