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Fitch Downgrades TDS Ratings to 'BB+'; Outlook Stable

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Fitch Ratings has downgraded USA based Telephone and Data Systems (TDS) and its subsidiary United States Cellular (USM) to 'BB ' from 'BBB '. The debt rating outlook remains Stable.

­Fitch said that the downgrade reflects its belief that in 2014 USM's wireless operations will continue to struggle with the highly competitive wireless environment, leading to weak EBITDA margins and lower EBITDA.

While subscriber trends in core markets may stabilize in the second half of 2014, the billing system and related issues that surfaced in late 2013 and in early 2014, as well as higher losses on equipment driven by strong smartphone sales, are expected to suppress 2014 operating profitability.

Billing system issues that contributed to higher voluntary churn in the fourth quarter of 2013 have declined, but higher levels of involuntary churn occurred in the first quarter of 2014 as a small but impactful percentage of customers had stopped paying their bills and the company dropped their service.

Postpaid subscriber additions at USM have been under material pressure for several years.

In the fourth quarter of 2013, USM began selling the iPhone which Fitch believes may reduce voluntary churn over time, and should the company succeed in improving gross additions, may eventually lead to subscriber growth. USM's gross adds in its core markets improved in the first quarter of 2014 by approximately 12% to reach 197,000, but Fitch believes continued improvement is needed to generate subscriber growth even if total postpaid churn can return to recent historical levels approximating 1.6%. Moreover, increased losses on equipment are expected as USM loads more costly LTE smartphones onto its network, with the impact being offset by increased service revenue over time. Losses on equipment could come down if there is a strong uptake of equipment installment plans.

The ratings at TDS, and by extension, USM, reflect the current strong liquidity position owing to the substantial cash balances, conservative balance sheet, undrawn revolving credit facilities and long dated maturities. The consolidated company does not have any material maturities until 2033.

In relation to its total outstanding debt of $1.721 billion at March 31, 2014, TDS has relatively high balances of cash and short-term investments, which amounted to $873 million and $40 million, respectively. A portion of the company's cash balance is expected to be used to finance the $261 million cash acquisition of BendBroadband in the third quarter of 2014.

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