Fitch Affirms Verizon's IDR at 'A-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Verizon Communications Inc.'s (NYSE:VZ) Issuer Default Ratings (IDRs) and debt ratings as follows:

--Long-term IDR at 'A-';

--Senior unsecured debt at 'A-';

--Senior unsecured bank facility at 'A-';

--Senior unsecured term loan due 2019 at 'A-';

--Short-term IDR at 'F2';

--Commercial paper (CP) at 'F2'.

Fitch has also assigned an 'A-' rating to Verizon's USD$870 million senior unsecured 4.8% notes due 2044 issued in Taiwan.

The Rating Outlook is Stable.

In addition, Fitch has reviewed and affirmed the ratings of certain VZ subsidiaries. A detailed list of the affirmations follows at the end of this release.

KEY RATING DRIVERS

--The February 2014 acquisition of the remaining Verizon Wireless (VZW) stake pressured VZ's near-term credit metrics, pushing pro forma leverage at closing to approximately 2.6x. Actual gross leverage at June 30, 2014 was 2.5x, with total debt at $110 billion. With the close of the acquisition, Fitch expects VZ to materially reduce debt over the next few years. EBITDA growth, combined with debt reductions, is expected to reduce leverage to around 2x by the end of 2016, a level more appropriate for an 'A-' rating. The precise timing of the reduction in leverage is subject to some uncertainty, given the potential for spending in upcoming auctions for wireless spectrum, a portion of which Fitch expects to be initially debt funded.

--Fitch believes metrics will return to a level appropriate for the rating in the 2016/2017 timeframe due to VZ's strong position in the wireless industry and the significant cash flows generated by the wireless business. This is in combination with VZ management's commitment to delever, as evidenced by the aggressive delevering following the acquisition of Alltel Corporation in early 2009.

--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) for the LTM ending June 30, 2014 was approximately $25.3 billion. Owing to the acquisition of the remaining VZW stake, Fitch estimates VZ's FCF (after dividends and capital spending) will be in the $4 billion to $6 billion range in 2014 as a result of transaction-related interest costs, higher dividend requirements due to the shares issued to Vodafone equity holders and higher cash taxes.

--VZW's strong competitive position, evidenced by industry-low churn rates on average, high margins, and the most developed LTE network in the U.S. support Fitch's expectations that VZ will maintain cash flow stability and support the longer rating horizon for leverage metrics to return to levels consistent with the rating.

VZ's liquidity is supported by its reported consolidated cash balances, which were $5.8 billion at June 30, 2014, and by its revolving credit facility. As of June 30, 2014, the company had a $6.2 billion revolving credit facility due in August 2017, as well as a $2 billion, 364-day revolving credit facility maturing in February 2015. In July, Verizon amended its revolving credit facility to increase the size to $8 billion from $6.2 billion and extended the maturity to July 2018 from August 2017. Fitch expects VZ 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.

On a consolidated basis, VZ and its subsidiaries have scheduled debt maturities of approximately $0.8 billion and $2.6 billion in 2014 and 2015, respectively.

In 2014, Fitch expects consolidated capital spending to range from $16.5 billion to $17 billion, comparable to or slightly higher than the $16.6 billion spent in 2013. Investment in the wireless network continues to be an area of emphasis due to the strong demand for 4G LTE capacity for rapidly growing data services.

RATING SENSITIVITIES

Fitch believes a positive rating action is unlikely in the foreseeable future, given the leverage incurred in the Vodafone transaction.

Conversely, 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 spending on spectrum through 2016. Fitch estimates even with some moderation in revenue growth and margin pressure that Verizon could spend up to $15 billion on spectrum before pressuring the rating. Discretionary management moves that cause leverage to rise above 2.5x, such as another material acquisition or stock repurchases, could lead to a negative action in the absence of a strong commitment to delever.

Fitch has affirmed ratings of the following Verizon entities with a Stable Outlook:

Cellco Partnership

--IDR at 'A-';

--Senior unsecured debt (co-issued with Verizon Wireless Capital LLC) at 'A-'.

Verizon Wireless Capital LLC

--Senior unsecured debt (co-issued with Cellco Partnership) at 'A-'.

Alltel Corp.

GTE Corp.

Verizon Delaware

Verizon California

Verizon Florida

Verizon Maryland

Verizon New England

Verizon New Jersey

Verizon New York

Verizon Pennsylvania

Verizon Virginia

--IDR 'A-';

--Senior unsecured at 'A-'.

GTE Southwest

--IDR 'A-';

--First mortgage bonds at 'A-'.

Verizon Global Funding (merged into Verizon in 2006)

--Senior unsecured at 'A-'.

The following rating is withdrawn as the debt has been repaid:

Verizon Communications Inc.

--Senior unsecured term loan due 2017 'A-'.

Fitch also affirms and withdraws the 'A-' IDR assigned to Verizon Wireless Capital LLC due to a change in policy to no longer assign IDRs to special-purpose financing entities that have no material assets, operational function or revenues. Fitch will continue to rate debt issues at these special-purpose financing entities, but in relationship to the parent company IDR.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).

Applicable Criteria and Related Research:

Rating Telecom Companies

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

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=869134

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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
Bill Densmore
Senior Director
+1-312-368-3125
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@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
Bill Densmore
Senior Director
+1-312-368-3125
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com