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Fitch Affirms Verizon's IDR at 'A-'; Outlook Stable
[May 12, 2015]

Fitch Affirms Verizon's IDR at 'A-'; Outlook Stable


Fitch Ratings has affirmed Verizon (News - Alert) Communications Inc.'s (Verizon; NYSE: VZ) Issuer Default Ratings (IDRs) and debt ratings following its announcement that it has reached an agreement to purchase AOL Inc. (AOL) for $50 per share, or approximately $4.4 billion.

The ratings have been affirmed as follows:

Verizon Communications Inc.

--Long-term IDR at 'A-';

--Senior unsecured debt at 'A-';

--Senior unsecured revolving credit facility due 2018 and term loan due 2019 at 'A-';

--Short-term IDR at 'F2';

--Commercial paper (CP) at 'F2'.

Fitch has also assigned an 'A-' rating to the approximately $1.5 billion senior unsecured term loan due 2016 (original amount $6.5 billion).

The Rating Outlook is Stable.

In addition, Fitch is maintaining the following issuers and their debt securities on Rating Watch Negative due to their expected sale in 2016:

Verizon California

Verizon Florida

--IDR 'A-';

--Senior unsecured debt 'A-'.

GTE Southwest

--IDR 'A-';

--First mortgage bonds 'A-'.

Other subsidiary ratings were affirmed as shown at the end of this release.

Verizon plans to purchase AOL via a tender offer followed by a merger, with the purchase funded by cash on hand and commercial paper. AOL will become a wholly-owned subsidiary of Verizon. The transaction is expected to close in mid-2015, following the customary regulatory approvals.

The ratings have been affirmed given the transaction's modest effect on Verizon's credit metrics. Strategically, the acquisition of AOL and its advertising platform and digital content will support Verizon's forthcoming mobile video offerings. The purchase will complement investments Verizon has made over the past few years in emerging digital media through Verizon Digital Media Services.

KEY RATING DRIVERS

Verizon's ratings are supported by the strong competitive position of Verizon Wireless (News - Alert) (VZW), as evidenced by industry-low churn rates, high margins and the most developed LTE network in the U.S. These factors are balanced against high leverage for the rating, which stems from the February 2014 acquisition of the remaining 45% stake in VZW. At March 31, 2015, last 12-months (LTM) gross leverage was 2.6x. Net leverage was approximately 2.5x, and incorporated cash of $4.4 billion at the end of the first quarter.

The recent acquisition of spectrum is expected to support VZW's competitive position in the coming years. In the first quarter of 2015 (1Q15), Verizon used cash and a $6.5 billion term loan to fund the remaining $9.5 billion owed for the $10.4 billion in spectrum acquired in the Federal Communications Commission's (FCC (News - Alert)) AWS-3 auction. Most of the term loan was repaid from proceeds received in the quarter from a $5 billion transaction with American Tower Corp. whereby Verizon sold exclusive rights to lease and operate the majority of its towers, and sold a small number of towers outright.

In 2016, Verizon expects to sell its wireline operations in California, Texas and Florida to Frontier Communications Corp. for approximately $10.5 billion. In total, these operations produce less than 5% and 4% of consolidated revenues and EBITDA, respectively. Approximately $600 million of debt will travel with the subsidiaries being sold. The net after-tax proceeds of $6.8 billion are expected to be used to reduce debt.

In February 2015, Verizon used a portion of its cash on hand to fund a $5 billion accelerated stock repurchase plan. As of the end of 1Q15, approximately $4.25 billion of shares were delivered to Verizon, with the remainder xpected to be delivered in 2Q15.



Verizon's liquidity is supported by its reported consolidated cash balances, which were $4.4 billion at March 31, 2015, and by its revolving credit facility (RCF). The $8 billion RCF matures in July 2018. Fitch expects Verizon to maintain aggregate CP balances within a level fully backed by the RCF. The credit facility has no ratings triggers or other restrictive financial covenants, such as leverage or interest coverage tests.

In March 2015, Verizon issued $13.4 billion of senior unsecured exchange notes due 2036, 2048 and 2055 for existing senior unsecured debt of about $10.4 billion that it had previously issued. The exchange reduced significant maturity towers in 2023 and 2043 (the tower in each year exceeded $10 billion) as well as lowered the average cost of debt.


On a consolidated basis, as of March 31, 2015, Verizon and its subsidiaries had expected maturities of approximately $1.7 billion for the remainder of 2015, and $7.2 billion in 2016.

KEY ASSUMPTIONS

--Fitch assumes Verizon revenues grow in the mid-single-digit range over the near term, excluding the effect of the asset sales, and that margins are relatively stable in the mid-30% range.

--Debt reduction, combined with EBITDA growth, is expected to reduce leverage to a level appropriate for the rating in the 2016/2017 timeframe due to Verizon's strong position in the wireless industry and the significant cash flows generated by the wireless business.

--VZW will continue to generate strong free cash flow (FCF). VZW's simple FCF (EBITDA less capital spending) for the LTM ended March 31, 2015 was approximately $25.5 billion.

--In 2015, Fitch expects consolidated capital spending to be in line with company guidance of $17.5 billion to $18 billion, slightly higher than the $17.2 billion spent in 2014. Investment in the wireless network continues to be an area of emphasis due to the strong demand for 4G LTE (News - Alert) capacity for rapidly growing data services.

--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

Fitch believes a positive rating action is unlikely in the foreseeable future, given the leverage incurred in the Vodafone (News - Alert) transaction.

Conversely, 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 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.

Fitch has affirmed the following Verizon subsidiaries with a Stable Outlook:

Cellco Partnership

--IDR at 'A-';

--Senior unsecured debt (co-issued with Verizon Wireless Capital LLC) at 'A-'.

Verizon Wireless Capital LLC

--Senior unsecured debt (co-issued with Cellco Partnership) at 'A-'.

Alltel Corp.

GTE Corp.

Verizon Delaware

Verizon Maryland

Verizon New England

Verizon New Jersey

Verizon New York

Verizon Pennsylvania

Verizon Virginia

--IDR at 'A-';

--Senior unsecured at 'A-'.

Verizon Global Funding (merged into Verizon in 2006)

--Senior unsecured debt at 'A-'.

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

Applicable Criteria and Related Research:

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

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

Applicable Criteria and Related Research:

Telecommunications: Ratings Navigator Companion

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809869

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=984525

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 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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