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Fitch Rates AT&T'S Senior Unsecured Notes Offering 'A-'; Outlook Stable
[April 23, 2015]

Fitch Rates AT&T'S Senior Unsecured Notes Offering 'A-'; Outlook Stable


Fitch Ratings has assigned an 'A-' rating to AT&T (News - Alert) Inc.'s (AT&T) note offering of six tranches of senior unsecured debt. The Rating Outlook is Stable.

Proceeds from this offering are expected to be used for general corporate purposes, including funding the cash consideration of previously announced acquisitions (including DIRECTV). If the DIRECTV acquisition is not completed on or prior to Nov. 30, 2015, or if it is terminated prior to that date, all notes excluding those maturing in 2025 and 2035, and the floating rate notes due in 2020, will be redeemed at 101% of the principal amount, plus accrued but unpaid interest up to but excluding the redemption date. Following the offering, AT&T does not anticipate issuing additional U.S.-dollar denominated senior notes for the remainder of 2015.

KEY RATING DRIVERS

The rating and Stable Rating Outlook reflect AT&T's intent to delever to a net leverage target of 1.8x over a three-year period following the completion of all pending transactions. Fitch estimates the 2015 transactions and acquisition of spectrum will cause net leverage to rise to pro forma 2.3x to 2.4x from approximately 1.8x at year-end 2014. In addition, the company is likely to reach gross leverage of approximately 2x, which in Fitch's view is appropriate for the 'A-' rating, by the end of 2017.

AT&T's largest pending acquisition, DIRECTV, is in the regulatory approval process and Fitch believes it has a high likelihood of going through, as it has been relatively uncontroversial. The debt raised for the cash component of the transaction as well as the modest effect of DIRECTV's higher leverage (net leverage of approximately 2x at year-end 2014) contribute to AT&T's higher leverage in the interim. DIRECTV's wholly-owned indirect subsidiary, DIRECTV Holdings LLC, has a Fitch IDR of 'BBB-'.

Debt levels have also increased due to the acquisition of spectrum in the Federal Communications Commission (FCC (News - Alert)) AWS-3 spectrum action, which closed at the end of January 2015. AT&T paid approximately $18.2 billion to acquire contiguous 10x10 MHz blocks of AWS-3 spectrum covering approximately 96% of the U.S. population.

To fund spectrum purchases, AT&T used a $11.155 billion in term loan facilities and a portion of its cash balances. At Dec. 31, 2014, cash and cash equivalents, pro forma for a $2.6 billion debt offering and the $2.5 billion acquisition of Iusacell (News - Alert), amounted to approximately $8.7 billion, and highly liquid certificates of deposit and time deposits amounted to approximately $1.9 billion.

At March 31, 2015, the company did not have any drawings on either its $5 billion revolving credit facility (RCF) due 2018 or its $3 billion RCF due 2017. The principal financial covenant for all facilities other than the $2 billion 18-month term loan facility due in September 2016 requires debt-to-EBITDA, as defined, to be no more than 3x.

For the LTMended March 31, 2015, FCF (net cash provided by operating activities less capital expenditures and dividends) was a nominal $56 million, and capital spending was $19.6 billion. FCF was pressured in the first quarter of 2015 due to a swing in working capital.



At March 31, 2015, total debt outstanding was approximately $96.5 billion. Relative to the company's cash, RCF availability, and modest expected free cash flow (FCF), Fitch believes upcoming debt maturities are manageable. Debt maturities are approximately $6.0 billion in 2015 and include approximately $1.7 billion of debt putable to the company on an annual basis that Fitch believes is unlikely to be put.

KEY ASSUMPTIONS


--Fitch assumes revenues will grow in the low single digits over the near term, and that margins, after the acquisition of DIRECTV, will remain relatively stable in the low-30% range.

--Fitch believes that through EBITDA growth and debt repayment AT&T is likely to reach gross leverage of approximately 2x by the end of 2017.

--Fitch believes the acquisition of DIRECTV will improve AT&T's financial flexibility owing to DIRECTV's strong FCF of approximately $3 billion annually and the significant equity component in the transaction financing. The acquisition is expected to be completed in the first half of 2015, following the necessary regulatory approvals.

--In 2015, Fitch expects consolidated capital spending to be in line with company guidance of $18 billion, lower than the $21.4 billion spent in 2014. Recently, AT&T completed wireless and wireline initiatives focused on its 4G LTE (News - Alert) and IP broadband networks, respectively, leading to a moderation of spending going forward.

--Potential spending in the FCC's 600 MHz TV broadcast auction, currently anticipated to occur in early 2016, is not included in Fitch's assumptions and will be an event-driven consideration.

RATING SENSITIVITIES

Negative: Fitch may take negative rating action if operating performance causes delevering to take place at a materially slower than anticipated pace, either alone or in combination with material debt-financed acquisitions. Discretionary management moves that cause the company to fall off its delevering path, such as another material acquisition or stock repurchases, could lead to a negative action in the absence of a strong commitment to delever.

Positive: Fitch believes a positive rating action is unlikely in the foreseeable future, given the leverage incurred primarily through the pending DIRECTV acquisition and spending on spectrum.

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

Applicable Criteria and Related Research:

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

--'Telecommunications - Ratings Navigator Companion' (Nov. 17, 2014).

Applicable Criteria and Related Research:

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=983506

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