AT&T to Raise $3 Billion in Debt Financing
Published on: 9th Feb 2012
Note -- this news article is more than a year old.
Fitch Ratings has assigned an 'A' rating to AT&T Inc.'s (AT&T) proposed offering of approximately USD3 billion in senior unsecured notes. The notes are expected to consist of three , five and 10 year maturities. Proceeds from the offering are expected to be used for general corporate purposes.
In Fitch's view, the 'A' rating is supported by AT&T's financial flexibility, which will enable the company to maintain leverage in the 1.5 times (x) to 1.7x range, which Fitch believes is appropriate for the current rating category. Additional key factors considered in AT&T's ratings include the company's diversified revenue mix, its significant size and economies of scale as the largest telecommunications operator in the U.S., and Fitch's expectation that AT&T will benefit from continued growth in wireless operating cash flows.
An intermediate-term risk for AT&T concerns its need to address spectrum requirements to support continued wireless growth, an element that has come to the forefront following the December 2011 termination of the acquisition of T-Mobile USA. In the meantime, AT&T is making smaller acquisitions of spectrum, as well as increasing capacity through efforts including cell-splitting, distributed antenna systems solutions and wi-fi solutions. Fitch believes AT&T has up to a two-year window before its spectrum need become a pressing concern and Fitch will assess the effect of efforts to gain access to larger amounts of spectrum on AT&T's credit profile as the financial implications become known.
In January 2012, AT&T announced that it would restart its common stock repurchase program which had been halted while the T-Mobile USA transaction was under consideration. Fitch's December 2011 affirmation of the rating following the termination of the transaction incorporated expectations that AT&T would return to stock repurchases. In Fitch's opinion, AT&T's strong free cash flow (FCF), which is expected to approximate $5 billion -- after dividends -- provides the company with the flexibility to repurchase stock while maintaining relatively stable credit metrics. AT&T has stated it will repurchase stock in the context of maintaining a net leverage metric of approximately 1.5x.
AT&T has disclosed that it may divest or restructure low performing assets or noncore assets over the next couple of years, without providing further details. Given the criteria outlined by AT&T of the assets under consideration, potential actions are unlikely to affect AT&T's ability to maintain stable credit metrics. Fitch believes assets likely to be reviewed include AT&T's directory business, owing to a fourth quarter 2011 impairment charge, and its rural access lines base, given it is not economic to upgrade such lines to its U-verse video and broadband product.
For 2011, AT&T's gross leverage was 1.6x and was 1.5x on a net debt basis, with both ratios adjusted to exclude the T-Mobile USA termination payment, a write-down in the directory business, and the actuarial losses on its benefit plans. Fitch expects year-end 2012 metrics to be flat with 2011.
Liquidity is provided by cash and FCF, and additional financial flexibility is provided by availability on the company's revolving credit facilities. At Dec. 31, 2011, total debt outstanding was approximately $64.7 billion, a moderate decline from approximately $66.2 billion at the end of 2010. Of the total, $3.4 billion consists of debt due within one year. At Dec. 31, 2011, cash amounted to $3.2 billion, and in 2011, AT&T produced $4.2 billion in FCF (net cash provided by operating activities less capital expenditures and dividends).
At year-end 2011, the company did not have any drawings on its $5 billion revolving credit facility due 2015, nor on its new $5 billion, 364-day facility established on Dec. 19, 2011. In January 2012, the size of the 364-day facility was reduced to $3 billion as the company assessed its needs following the termination of the T-Mobile USA transaction. The principal financial covenant for the 2015 facility requires debt to EBITDA, as defined in the agreement, to be no more than 3x. The identical financial covenant is only applicable in the 364-day facility if advances are converted into a term loan.
AT&T's guidance for capital spending in 2012 calls for spending to remain stable relative to the $20 billion spent in 2011. Although the overall total spending level is stable, within the mix higher wireless spending will offset a decline in wireline-related spending. The company indicates pre-dividend FCF is expected to be in the $15 billion to $16 billion range from the $14.4 billion achieved in 2011.
Maturing debt in 2012, including amounts that could be put to the company, approximates $3.4 billion.