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

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