Fitch Revises AT&T's Outlook to Negative
Fitch Ratings has affirmed the 'A' Issuer Default Ratings (IDRs) and debt security ratings of AT&T and its subsidiaries. The company's short-term IDR and commercial paper ratings have been affirmed at 'F1'.
The Rating Outlook, which Fitch only applies to long-term debt securities, has been revised to Negative from Stable.
The current 'A' rating is supported by AT&T's financial flexibility, 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.
The Negative Outlook reflects Fitch's expectation that AT&T's net leverage is likely to move up to a recently disclosed 1.8x upper boundary for leverage, which represents a notable increase from the 1.47x at the end of the third quarter of 2012 on a last 12 month basis. The increased leverage is expected to arise from the combined effects of a moderate increase in wireless and wireline capital spending and the continuation of its share repurchase program as announced in early November 2012. Prospective leverage expectations are subject to uncertainty caused by the rate of stock repurchases, actual capital expenditure levels, possible acquisitions (such as longer-term spectrum needs) and asset divestitures (of which there are none in Fitch's expectations).
Fitch believes increased capital spending will strengthen the company's competitive position and is a positive rating factor. Over the next three years, capital spending will increase about 10-12% over prior baseline levels to $22 billion annually and then revert to mid-teen historical levels. The investment program will expand the population covered by AT&T's LTE network by approximately 20% to 300 million, and enable the company to provide higher broadband speeds over its wireline network in more rural areas. By comparison, the company's original capital spending guidance for 2012 was about $20 billion although the company reduced guidance to the low end of a $19 billion to $20 billion range in October 2012.
Over the 2013-2015 period, the company will spend approximately $8 billion to increase its LTE network coverage from 250 million to 300 million pops (persons of population). This coverage is expected to be completed by the end of 2014. In addition to increasing LTE coverage, AT&T will be increasing capacity through the addition of 10,000 new macro cell sites, 1,000 distributed antenna systems and 40,000 small cells. Up to nearly 30MHz of new spectrum in the wireless communications spectrum (WCS) band will be deployed nationwide, with service to be commercial in 2015. Approximately $6 billion will be spent to upgrade the broadband speeds available to 75% of the customer locations in the company's wireline footprint. In the remaining 25% of the customer locations where it will not be economic to upgrade the wireline network to faster broadband speeds, the company will offer a 4G LTE solution. These customer locations are scattered across 65% of the company's geography.
In early 2012, AT&T started repurchasing common stock under a December 2010 authorization. The company did not repurchase stock under the authorization while the T-Mobile USA transaction was under consideration in 2011. Through the first nine months of 2012, AT&T's strong free cash flow and operating results have enabled the company to maintain its net leverage metric around 1.5x even while repurchasing nearly $9 billion of common stock. Fitch expects free cash flow to decline from the $8 billion to $9 billion expected in 2012 to $4 billion annually, on average, over the next three years.
For 2012, Fitch expects AT&T's leverage to be flat with 2011, when gross leverage was 1.56x as adjusted for non-recurring items and the actuarial losses on its benefit plans. After 2012, AT&T's continuation of stock repurchases, necessitating some borrowing as repurchases will be above free cash flow levels, will push leverage up over time, with net leverage expected to peak near a 1.8x upper boundary in 2014. Thereafter, leverage is expected to decline over time.
In Fitch's view, liquidity is strong and provided by the company's FCF; additional financial flexibility is provided by availability on the company's revolving credit facilities. At Sept. 30, 2012, total debt outstanding was approximately $63.7 billion, a moderate decline from the $64.8 billion outstanding at the end of 2011. Of the total, $3.4 billion consists of debt due within one year, including debt that can be put to the company. At Sept. 30, 2012, cash amounted to $2.2 billion, and for the last 12 months ending Sept. 30, 2012, AT&T produced $7 billion in FCF (net cash provided by operating activities less capital expenditures and dividends).
At end of the third quarter of 2012, the company did not have any drawings on its $5 billion revolving credit facility due 2015, nor on its $3 billion, 364-day facility due December 2012. 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.
Relative to the company's expected free cash flows, upcoming debt maturities are manageable. There are no material debt maturities remaining in 2012. In 2013, debt maturities approximate $3.4 billion, including approximately $1.6 billion in debt that may be put to the company. Maturities amount to $3.8 billion in 2014.