Fitch Upgrades DIRECTV Holding's IDR to 'A-'; Outlook Stable

CHICAGO--()--Fitch Ratings has upgraded the Issuer Default Rating (IDR) and senior unsecured debt ratings for DIRECTV Holdings LLC (DTVH) to 'A-' from

'BBB-'. The action follows the acquisition of DIRECTV, DTVH's ultimate parent, by AT&T Inc. (AT&T). In addition, Fitch has removed DTVH's ratings from Positive Watch, which had been in place since the acquisition was announced in May 2014. The Rating Outlook for DTVH is Stable.

DTVH's upgrade is due to AT&T's ownership of the company following the close of the transaction on July 24, 2015. AT&T's IDR is 'A-' with a Stable Outlook. DTVH's rating is based on the view that under Fitch's criteria the linkage to AT&T's rating is strong given the strategic nature of the transaction even though Fitch does not expect the debt to be guaranteed by AT&T. In Fitch's opinion, DIRECTV is strategically important to AT&T due to its size, potential cash flow, programming cost savings and other cost synergies. Both companies are expanding in Latin America, which has solid long-term growth potential.

KEY RATING DRIVERS

Large Scale and Financial Flexibility: The 'A-' rating assigned to AT&T Inc. (AT&T) is underpinned by the company's diversified revenue mix, its significant size and economies of scale as the largest telecommunications operator in the U.S., healthy FCF anticipated following the DIRECTV acquisition and Fitch's expectation that it will benefit from continued growth in wireless operating cash flow.

Deleveraging Expected: The rating and Stable Rating Outlook reflect AT&T's intent to deleverage to a net leverage target of 1.8x over the next few years following the completion of the transaction. Fitch estimates 2015 investments in spectrum and its Mexican operations, as well as the DIRECTV acquisition, will cause 2015 net leverage to rise to pro forma 2.3x to 2.4x from approximately 1.8x at year-end 2014. After 2015, Fitch believes leverage will gradually decline, likely reaching approximately 2x by the end of 2017, which in Fitch's view is appropriate for the 'A-' rating.

DIRECTV Acquisition: Fitch believes AT&T's acquisition of DIRECTV will increase its financial flexibility given improved FCF and lower future dividend payout ratio. Approximately $2.5 billion in synergies are expected, including programming cost synergies that will improve the profitability of AT&T's U-verse video product. There are some limitations to the combined entities' synergies since there is not a common linear video delivery platform. Fitch believes there are potential benefits that could accrue to AT&T from the DIRECTV acquisition in differentiating its wireless business as the mobile video landscape evolves, but other than expectation for continued growth in wireless data usage, Fitch has not assumed additional revenues from potential mobile video offerings.

DIRECTV also brings in the potential for longer term growth in revenue the Latin American pay TV market.

Spectrum Licenses Acquired: AT&T's debt levels have also increased due to the acquisition of spectrum in the Federal Communications Commission's (FCC) AWS-3 spectrum action, which closed at the end of January 2015. AT&T paid approximately $18.2 billion to acquire contiguous 10x10 MHz blocks of AWS-3 spectrum covering approximately 96% of the U.S. population.

Capital Spending: In 2015, Fitch expects consolidated capital spending to be in line with company guidance of $18 billion, lower than the $21.4 billion spent in 2014. AT&T's guidance incorporates spending related to its expansion of its recently acquired Mexican wireless operations but does not incorporate DIRECTV's annual capital spending levels of approximately $3 billion. Spending by AT&T on its core wireless and wireline networks has declined in 2015 as 4G LTE has been widely deployed, and as initiatives to increase wireline IP broadband network speeds have been completed.

Broadcast TV Spectrum Auction: Potential spending in the FCC's 600 MHz TV broadcast auction, currently anticipated to occur in early 2016, is not included in Fitch's assumptions and will be an event-driven consideration.

KEY ASSUMPTIONS

--Fitch assumes revenues will grow in the low single digits over the near term, and that margins, after the acquisition of DIRECTV, will remain relatively stable in the low-30% range.

--Fitch believes that through EBITDA growth and debt repayment AT&T is likely to reach gross leverage of approximately 2x by the end of 2017.

--Fitch believes the acquisition of DIRECTV will improve AT&T's financial flexibility owing to DIRECTV's strong FCF of approximately $3 billion.

--In 2015, Fitch expects consolidated capital spending to be in line with company guidance of $18 billion, lower than the $21.4 billion spent in 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.

--Potential spending in the FCC's 600 MHz TV broadcast auction, currently anticipated to occur in early 2016, is not included in Fitch's assumptions and will be an event-driven consideration.

RATING SENSITIVITIES

Positive Rating Action: Fitch believes a positive rating action is unlikely in the foreseeable future, given the leverage incurred primarily through the DIRECTV acquisition and spending on spectrum.

Negative Rating Action: Fitch may take negative rating action if operating performance causes deleveraging to take place at a materially slower-than-anticipated pace, either alone or in combination with material debt-financed acquisitions. Discretionary management moves that cause the company to fall off its deleveraging path, such as another material acquisition or stock repurchases, could lead to a negative action in the absence of a strong commitment to deleverage.

LIQUIDITY

Strong Liquidity: At June 30, 2015, AT&T did not have any drawings on either its $5 billion revolving credit facility (RCF) due 2018 or its $3 billion RCF due 2017. The principal financial covenant for all facilities requires debt-to-EBITDA, as defined, to be no more than 3x.

For the LTM ended June 30, 2015, FCF (net cash provided by operating activities less capital expenditures and dividends) was $2.1 billion, and capital spending was $16.5 billion. Fitch believes the acquisition of DIRECTV will improve AT&T's financial flexibility owing to DIRECTV's strong FCF of approximately $3 billion. Following its April 2015 offering of $17.5 billion in senior unsecured notes -- primarily to fund the cash portion of the DIRECTV transaction -- AT&T does not anticipate issuing additional U.S. dollar-denominated senior notes for the remainder of 2015.

Debt Maturities: At June 30, 2015, AT&T's gross debt outstanding was approximately $113.7 billion, and including cash of $21 billion, net debt was $92.7 billion. AT&T's cash includes all cash needed to fund the cash portion of the DIRECTV acquisition. DIRECTV will add an additional $19.4 billion of debt. Relative to the company's cash (Fitch estimates $10 billion pro forma for DIRECTV), RCF availability and expected FCF, Fitch believes AT&T's upcoming debt maturities are manageable. Debt maturities are approximately $2.8 billion in the second half of 2015 and in 2016 maturities -- excluding DTVH maturities -- are $9.2 billion including approximately $1.7 billion of debt putable to the company. DTVH has $2.25 billion maturing in 2016.

FULL LIST OF RATING ACTIONS

Fitch has upgraded DTVH's ratings as follows:

DIRECTV Holdings LLC

--Long-Term IDR to 'A-' from 'BBB-';

--Senior unsecured notes to 'A-' from 'BBB-'.

In addition, Fitch has upgraded and withdrawn the following facilities, which were terminated:

--Senior unsecured credit facilities to 'A-' from 'BBB-' and withdrawn.

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

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988598

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988598

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
John C. Culver, CFA
Senior Director
+1-312-368-3216
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
David Peterson
Senior Director
+1-312-368-3177
or
Committee Chairperson
Philip Zahn, CFA
Senior Director
+1-312-606-2336
or
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
John C. Culver, CFA
Senior Director
+1-312-368-3216
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
David Peterson
Senior Director
+1-312-368-3177
or
Committee Chairperson
Philip Zahn, CFA
Senior Director
+1-312-606-2336
or
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com