Fitch Rates AT&T's $3B Debt Offering 'A'; Outlook Stable

Fitch Ratings has assigned an 'A' rating to AT&T's $3 billion three-tranche debt offering. The proceeds from the offering are expected to be used for general corporate purposes. The Rating Outlook is Stable.

The rating incorporates Fitch's expectations that AT&T has the financial flexibility to maintain leverage in a range appropriate for the current rating category. Fitch expects AT&T to maintain credit-protection metrics, in the form of debt-to-EBITDA, of 1.5 times (x) or lower over Fitch's rating horizon. Leverage was slightly higher than this level at the end of the first quarter of 2008, but is expected to be within AT&T's target level by the end of the year through a combination of debt reduction and EBITDA growth.

Fitch had previously noted that AT&T would have borrowing needs in 2008, owing to payments in April 2008 associated with the Federal Communications Commission's recently completed 700 MHz spectrum auction where AT&T's winning bids totaled approximately $6.6 billion, the $2.5 billion spectrum purchase from Aloha Partners, L.P. in February 2008 for the acquisition of additional 700 MHz spectrum, and to make further share repurchases.

AT&T's ratings also reflect its diversified revenue mix, its significant size and economies of scale as the largest wireline, wireless and enterprise services operator in the United States, as well as Fitch's expectation that AT&T will benefit from continued growth in wireless operating cash flows. AT&T's revenue mix is diversified among three key lines of business. In the first quarter of 2008, wireless segment revenues grew 18.3% while generating approximately 38% of total segment revenues and the enterprise line of business, which returned to growth in 2007, produced more than 15% of total segment revenues. Both the wireless segment and the enterprise line of business are expected to continue to grow revenues in 2008. The consumer segment, facing rising competition from cable operators, continued wireless substitution and a weakening economic environment, approximated 18% of the company's total segment revenues in 2007.

Fitch believes in-region consumer revenues should remain relatively stable in 2008, even considering some pressure from the weakening economy and housing downturn, due to continued deployment of video and broadband services. Revenues are also derived from in-region business (small and medium-sized business), wholesale services, national mass markets (which are declining rapidly), as well as the advertising and publishing businesses. The 2006 BellSouth Corp. (BellSouth) and 2005 AT&T Corp. mergers have provided increased scale, as AT&T achieved approximately $3.9 billion in synergies and operational expense savings in 2007 and expects savings to grow by more than $2 billion in 2008. By 2010, expense synergies--plus additional operational cost initiatives--are expected to reach $7.0 billion.

Issues to monitor regarding AT&T's ratings include competition in the consumer segment, the execution risk posed by the integration of BellSouth's operations into AT&T's business and the effect of AT&T's stock-repurchase activities on debt levels. To offset the effects of competition on cash flow, AT&T must continue to be successful in controlling costs, achieve merger-related synergies and successfully implement its network-based video strategy.

At the end of the first quarter of 2008, AT&T had $73.5 billion in debt outstanding and cash amounted to $2.0 billion. AT&T's liquidity is strong. To back its commercial paper program, AT&T currently has a $3 billion facility which expires on Dec. 15, 2008, and the five-year credit facility that expires in July 2011 with $10 billion of availability. With regard to the five-year facility, AT&T has an option to increase the $10 billion amount to $12 billion, with agreement by the lending banks. The principal financial covenant in both agreements requires debt-to-EBITDA, as defined in the agreements, to be no more than 3x. In 2007, AT&T produced $7.6 billion in free cash flow, and Fitch believes free cash flow could be at a similar level in 2008, given potential additional merger synergies and continued growth in wireless and enterprise service revenues.

AT&T has approximately $4.3 billion of long-term debt maturing during the remainder of 2008, and maturities in 2009 and 2010, are approximately $6 billion and $3.8 billion respectively.

Posted to the site on 9th May 2008