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Fitch Rates Verizon's Sr. Unsecured Note Offering 'A-'; Outlook Stable
[October 26, 2016]

Fitch Rates Verizon's Sr. Unsecured Note Offering 'A-'; Outlook Stable


Fitch Ratings has assigned an 'A-' rating to Verizon (News - Alert) Communications Inc.'s (Verizon; NYSE: VZ) multi-tranche offering of Euro and Sterling senior unsecured notes. Proceeds will be used for general corporate purposes, including the acquisitions of Fleetmatics Group PLC and XO Holdings' wireline assets as well as for the potential repayment of debt, depending on market conditions. Verizon's Long-Term Issuer Default Rating (IDR) is 'A-' and the Rating Outlook is 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 Sept. 30, 2016, core telecom leverage was 2.4x and total adjusted debt/EBITDAR was 2.9x. 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/144A and on-balance-sheet asset-backed securitizations). Securitizations are included in total adjusted debt/EBITDAR measures.

Pending Acquisitions: In July 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). In September 2016, Yahoo disclosed that a copy of certain information related to approximately 500 million user accounts was stolen; this could have a material adverse effect on the transaction and Verizon is evaluating the impact of the event on the transaction. The transaction is expected to close in early 2017, following customary approvals including approvals by regulators and Yahoo's shareholders.

Verizon's acquisition of XO Communications' (News - Alert) (XO) fiber network business for approximately $1.8 billion is expected to close by the end of the first quarter of 2017 (1Q17). In August 2016, the acquisition of telematics provider Fleetmatics for $2.4 billion was announced, 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 pre-tax proceeds of $10.5 billion. Approximately $600 million of debt transferred with the subsidiaries. In April 2016, Verizon used the $10.5 billion in pre-tax proceeds and cash on hand to tender for and redeem early $10.7 billion in existing debt.

KEY ASSUMPTIONS

--Fitch assumes Verizon's EBITDA grows below 1% in 2016 over 2015. Fitch expects midsingle 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 Sept. 30, 2016, was approximately $28.5 billion.

--In 2016, Fitch expects consolidated capital spending to be at the low end of 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 LTE capacity for rapidly growing data services.

--Fitch has included modest spending on spectrum in the FCC's 600 MHz TV broadcast auction, currently underway. Spectrum (News - Alert) 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 current levels of leverage.

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 $6.4 billion at Sept. 30, 2016, and by its undrawn revolving credit facility (RCF).

In 3Q16, Verizon amended its RCF, increasing its availability to $9 billion from $8 billion and extending its maturity to September 2020 from 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 companywill 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 1Q16, 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 Sept. 30, 2016, Verizon and its subsidiaries had no material maturities remaining in 2016, and expected debt maturities of approximately $3.8 billion in 2017.

Date of Relevant Rating Committee: July 26, 2016.


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.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013803

Endorsement Policy

https://www.fitchratings.com/regulatory

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