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Fitch Assigns an 'A-' IDR to Cellco Partnership; Outlook StableFitch Ratings has assigned an 'A-' Long-Term Issuer Default Rating (IDR) to Cellco Partnership, a subsidiary of Verizon (News - Alert) Communications Inc. (Verizon; NYSE: VZ). The Rating Outlook is Stable. Fitch rates certain credit-linked notes which are linked to Cellco Partnership--Grain Spectrum Funding, LLC and Grain Spectrum Funding II, LLC. The IDR was withdrawn on July 26, 2016 (see "Fitch Affirms Verizon's IDR at 'A-'; Outlook Stable"). KEY RATING DRIVERS Competitive Position: The ratings are supported by Verizon Wireless's (News - Alert) (VZW) strong competitive position, as evidenced through industry-low churn rates, high margins and the extensive coverage of approximately 98% of the U.S. population with its 4G LTE network. These factors are balanced against moderately high leverage for the rating, which stems from the February 2014 acquisition of the remaining 45% stake in VZW. Core Telecom Leverage: At June 30, 2016, core telecom leverage was 2.3x and total adjusted debt/EBITDAR was 2.8x. Including the Yahoo acquisition and other pending acquisitions, Fitch expects Verizon's core telecom leverage to decline to approximately 2.2x by 2017 while total adjusted debt/EBITDAR is expected to approximate 2.8x. Core telecom leverage excludes securitizations (both off-balance-sheet and public and on-balance-sheet asset-backed securitizations). Securitizations are included in total adjusted debt/EBITDAR measures. Yahoo Acquisition: On July 25, 2016, Verizon announced a definitive agreement with Yahoo! Inc. (Yahoo) whereby it will acquire the subsidiaries holding Yahoo's operating businesses for approximately $4.83 billion in a cash transaction (subject to closing adjustments). The transaction is expected to close in early 2017, following customary approvals including approvals by regulators and Yahoo's shareholders. Other Pending Acquisitions: Verizon announced the acquisition of XO Communications' (XO) fiber network business in February 2016 for approximately $1.8 billion. The transaction is expected to close in the first half of 2017, pending regulatory approvals. Separately, Verizon entered into a lease of XO's wireless spectrum, with an option to buy the entity that holds the spectrum by the end of 2018. In June 2016, the acquisition of telematics provider Telogis (News - Alert) Inc. was announced for an undisclosed sum, and the transaction is expected to close by the end of 2016. Wireline Asset Sale: In April 2016, Verizon completed the sale of its wireline operations in California, Texas and Florida to Frontier Communications Corp. (Frontier) for $10.5 billion. Approximately $600 million of debt transferred with the subsidiaries. Debt Reduction: In April 2016, Verizon used the $10.5 billion in Frontier proceeds and cash on hand to tender for and redeem early $10.7 billion in existing debt. Frontier also assumed $600 million in debt of the acquired entities. KEY ASSUMPTIONS --Fitch assumes Verizon's EBITDA grows below 1% in 2016 over 2015. Fitch expects mid-single digit EBITDA growth in 2017, based on organic revenue growth slightly below Fitch's expectations for domestic GDP growth plus the effect of acquisitions. --Debt reduction in the core business, combined with EBITDA growth, is expected to reduce core telecom leverage to the low 2x range by 2017/2018. --VZW will continue to generate strong free cash flow (FCF) on an operational basis. VZW's simple FCF (EBITDA less capital spending) for the latest 12 months (LTM) ended June 30, 2016, was approximately $28.3 billion. --In 2016, Fitch expects consolidated capital spending to be in line with company guidance of $17.2 billion to $17.7 billion. Investment in the wireless network continues to be an area of emphasis due to the strong demand for 4G TE capacity for rapidly growing data services. --Fitch has included modest spending on spectrum in the FCC's (News - Alert) 600 MHz TV broadcast auction, currently underway. Spectrum spending approaching or exceeding levels spent in the AWS-3 auction will be an event-driven consideration. RATING SENSITIVITIES Positive Rating Action: Fitch believes a positive rating action is unlikely in the foreseeable future, given the leverage incurred in the Vodafone (News - Alert) transaction. Negative Rating Action: Fitch may take a negative rating action if operating performance causes deleveraging 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 deleverage. LIQUIDITY Strong Liquidity Profile: Verizon's liquidity is supported by its reported consolidated cash balances, which were $2.9 billion at June 30, 2016, and by its revolving credit facility (RCF). The undrawn $8 billion RCF matures in July 2018. Fitch expects Verizon to maintain aggregate commercial paper (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. Verizon's cash from operations in 2016 will be negatively affected by certain items. The company will incur higher cash taxes on a business-as-usual basis as the cash tax rate moves toward the effective tax rate and by the cash tax payment arising from the gain on sale of the wireline assets to Frontier. Additionally, wireless handset financing under the equipment installment programs will pressure cash from operations, as the public securitizations funding handset sales beginning in the third quarter of 2016 will be recorded in cash from financing activities. This is a change in presentation from the private securitizations undertaken in 2015 and the first quarter of 2016, which were recorded in operating activities. Further, cash from operations in 2015 was also boosted on a non-recurring basis by the portion of the tower sale proceeds (approximately $2.4 billion) recorded in operating activities. Debt Maturities: On a consolidated basis, as of March 31, 2016, Verizon and its subsidiaries had expected debt maturities of approximately $2.3 billion in 2016 and $3.8 billion in 2016 and 2017, respectively. The 2016 maturity will be funded by an offering on July 27, 2016. The 2016 amounts are after debt issues redeemed or repaid via tender offers. Additional information is available on www.fitchratings.com. Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Securitized equipment installment receivables are not included in core telecom leverage and are included in off-balanced sheet debt. Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009573 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009573 Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31 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. View source version on businesswire.com: http://www.businesswire.com/news/home/20160727006625/en/ |
