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Fitch Rates Verizon Communications' Proposed Offering 'A-'; Outlook Stable
[October 22, 2014]

Fitch Rates Verizon Communications' Proposed Offering 'A-'; Outlook Stable


CHICAGO --(Business Wire)--

Fitch Ratings has assigned an 'A-' rating to Verizon Communications Inc.'s (NYSE: VZ) issuance of benchmark-sized senior unsecured notes. VZ plans to use the proceeds primarily for the redemption of existing notes with maturities ranging from 2015 to 2018. The redemptions are expected to be completed in the fourth quarter 2014. Any remaining proceeds will be used for general corporate purposes. Fitch currently rates VZ's IDR 'A-' with a Stable Rating Outlook.

KEY RATING DRIVERS

--The February 2014 acquisition of the remaining Verizon Wireless (News - Alert) (VZW) stake has pressured VZ's recent credit metrics, pushing pro forma leverage at closing to approximately 2.6x. Actual gross leverage at Sept. 30, 2014 was 2.5x, with total debt at $109.2 billion. Fitch expects VZ to materially reduce debt over the next few years. This, combined with EBITDA growth, is expected to reduce leverage to around 2x by the end of 2016, a level more appropriate for an 'A-' rating. The precise timing of the reduction in leverage is subject to some uncertainty, given the potential for spending in upcoming auctions for wireless spectrum, a portion of which Fitch expects to be initially debt funded.

--Fitch believes metrics will return to a level appropriate for the rating in the 2016/2017 timeframe due to VZ's strong position in the wireless industry and the significant cash flows generated by the wireless business. This is in combination with VZ management's commitment to delever, which has been demonstrated in the past as evidenced by the aggressive delevering following the acquisition of Alltel (News - Alert) Corporation in early 2009.

--A key to debt reduction over the next several years will be the continued generation of strong free cash flow (FCF) at VZW. VZW's simple FCF (EBITDA less capital spending) for the latest 12 months (LTM) ending Sept. 30, 2014 was approximately $25.4 billion. Owing to the acquisition of the remaining VZW stake, Fitch estimates VZ's FCF (after dividends and capital spending) will be in the $4 billion to $6 billion range in 2014 as a result of transaction-related interest costs, higher dividend requirements due to the shares issued to Vodafone (News - Alert) equity holders and higher cash taxes.

--VZW's strong competitive position, evidenced by industry-low churn rates on average, high margins, and the most developed LTE (News - Alert) network in the U.S. support Fitch's expectations that VZ will maintain cash flow stability and support the longer rating horizon for leverage metrics to return to levels consistent with the rating.

VZ's liquidity is supported by its reported consolidated cash balances, which were $7.2 billion at Sept. 30, 2014, and by its revolving credit facility In July, Verizon amended its revolving credit facility to increase the size to $8 billion from $6.2 billion and extended the maturity to July 2018 from August 2017. Fitch expects VZ to maintain aggregate commercial paper (CP) balances within a level fully backed by the facility. The credit facility has no ratings triggers or other restrictive covenants, such as leverage or interest coverage tests.



On a consolidated basis, VZ and its subsidiaries have no material debt maturities in 2014, and approximately $2.6 billion in 2015.

In 2014, Fitch expects consolidated capital spending to be approximately $17 billion, slightly higher than the $16.6 billion spent in 2013. Investment in the wireless network continues to be an area of emphasis due to the strong demand for 4G LTE capacity for rapidly growing data services.


RATING SENSITIVITIES

Fitch believes a positive rating action is unlikely in the foreseeable future, given the leverage incurred in the Vodafone transaction.

Conversely, Fitch may take negative rating action if operating performance causes deleveraging to take place at a materially slower than anticipated pace, either alone or in combination with spending on spectrum through 2016. Fitch estimates even with some moderation in revenue growth and margin pressure that Verizon could spend up to $15 billion on spectrum before pressuring the rating. Discretionary management moves that cause leverage to rise above 2.5x, such as another material acquisition or stock repurchases, could lead to a negative action in the absence of a strong commitment to delever.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).

Applicable Criteria and Related Research:

Rating Telecom Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=904354

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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