Cingular's Debt Downgraded

The debt ratings agency, Fitch has lowered the rating on Cingular Wireless' senior unsecured long-term debt to 'A-' from 'A'. The short-term rating assigned to Cingular's commercial paper program has been downgraded to 'F2' from 'F1'. Fitch says that the Rating Outlook remains Negative.

The rating downgrade is reflective of Fitch's concern over the deterioration associated with Cingular's wireless business due to several operational and strategic issues. While Cingular has offset some of the operational impacts through cost containment initiatives, given the challenges within the wireless industry and the deployment issues associated with the GSM/GPRS overlay, Fitch believes pressure will remain on revenue growth and EBITDA over the near term. However, the rating is upheld by the company's links to its highly rated parents, SBC Communications (SBC) and BellSouth (BLS). On a stand-alone basis, Cingular's long-term rating would likely approximate 'BBB'.

Cingular lost significant market momentum in the fourth quarter of 2002 with its share of gross additions among the top six nationwide operators falling from approximately 20% at the beginning of 2002 to 14% by year-end. New management is providing market regions with greater flexibility to target specific market requirements. Despite these initiatives, Fitch says that it remains concerned whether Cingular might find it difficult to generate positive momentum in the fiercely competitive wireless marketplace.

With postpaid digital net additions materially below expectations for the last two quarters, Cingular must improve postpaid additions close to past benchmark levels to ensure future profitable growth. Additionally, over the past six quarters, Cingular has struggled with net additions due specifically to two subscriber groups, the analogue and reseller segment, which lost approximately one million subscribers in 2002. The reseller segment, particularly due to WorldCom's subscribers, was an incrementally profitable opportunity for Cingular due to negligible acquisition and customer service costs. In 2003, Fitch believes churn will likely remain higher than 2002 levels due to potential issues associated with the TDMA/GSM overlay, continued erosion of its 1.4 million analogue subscriber base and higher customer churn associated with the reseller/prepaid segment. Targeted retention efforts should help in combating churn.

Cingular's challenges are further exacerbated by declining industry fundamentals and a capital-intensive GSM overlay. The company is in the midst of deploying its next generation technology but is behind the other nationwide operators, which have materially completed their infrastructure upgrades. Margins will remain pressured as Cingular completes the technology migration.

While Cingular's business operations are challenged, the company has several strengths that should be considered. Cingular is the second largest wireless operator in the U.S. with 22 million subscribers, which provides significant scale of operations and generates approximately US$4.4 billion of EBITDA annually.

The Rating Outlook remains Negative based on the recent trends in operating performance, technology platform concerns and competitive issues. If Cingular is not successful in stabilizing operational results and continued deterioration occurs in operating performance during 2003, Fitch says a further downgrade is likely."

Posted to the site on 24th February 2003