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T - AT&T Inc News Story

$30.86 -0.2  -0.6%

Last Trade - 29/05/20

Sector
Telecoms
Size
Large Cap
Market Cap £178.13bn
Enterprise Value £317.45bn
Revenue £145.13bn
Position in Universe 26th / 6364

Fitch Rates AT&T's European and U.S. Preferred Issuances 'BBB'; Outlook Stable

Wed 12th February, 2020 8:52pm
(The following statement was released by the rating agency)


Fitch Ratings-Chicago-February 12: 

Fitch Ratings has assigned 'BBB' ratings to ATT Inc.'s (NYSE: T) offerings of 
Euro perpetual preferred stock and U.S. perpetual preferred stock; both have 
been assigned 50% equity credit. ATT's Long-Term Issuer Default Rating (IDR) is 
'A-'. The Rating Outlook is Stable.

The company intends to use the proceeds for general corporate purposes.

AT&T Inc.

----preferred; Long Term Rating; New Rating; BBB

Key Rating Drivers

Large Scale and Diversification: ATT's 'A-' rating is underpinned by a 
diversified revenue mix, significant size and economies of scale as the largest 
telecommunications operator in the U.S. In several verticals, including 
wireless, video distribution, residential broadband/voice, business wireline and 
media/entertainment, ATT is the largest, or among the largest, providers of 
media and telecommunications services. 

Financial Flexibility: The company's financial flexibility is supported by solid 
and improved FCF after the 2018 acquisition of Time Warner, committed revolver 
availability and improving distribution of long-term debt maturities. Material 
cash uses include dividends and capital spending. Of these uses, Fitch believes 
in a stress scenario there would be a modest level of flexibility regarding 
capex, with wireless capital spending, including 5G, remaining a priority. 

Near-Term Leverage Elevated: ATT's gross core telecom leverage has been elevated 
due to the mid-2018 merger with Time Warner. As a result of delevering efforts 
since the close of the merger, ATT's gross core leverage at the end of 2019 was 
around Fitch's 2.5x threshold for the 'A-' rating. 

To determine core telecom leverage, Fitch applied a 5:1 debt/equity ratio to the 
company's handset receivables, after adding back off-balance-sheet 
securitizations. Fitch's conservative rating case view, with the updated 
guidance, indicates gross core telecom leverage in the low 2x range by 2021.

Asset Sales: ATT prioritized debt reduction in the near term via FCF and the 
monetization of noncore assets in 2019 and 2020. Fitch's forecast includes an 
amount at the lower end of ATT's $5 billion-$10 billion range for 2020. Updated 
guidance indicates 50%-70% of post-dividend FCF will be used to repurchase 
approximately 70% of the shares issued to acquire Time Warner. ATT is also 
targeting the retirement of all the acquisition debt incurred in the Time Warner 
transaction by 2022.

Acquisition of Time Warner: Fitch believes the mid-2018 acquisition of Time 
Warner, now Warner Media, LLC, provides ATT with a strong foothold in the 
evolving communications and media landscape. This includes the growing 
prominence of alternative distribution platforms and audience fragmentation in 
the context of a stagnant multichannel video subscriber base. Other benefits are 
the diversification of revenue stream and added financial flexibility owing to 
Warner Media's strong FCF. 

Warner Media's Strong Asset Portfolio: The stability, recurring revenue and FCF 
generation of the cable networks businesses, Turner and Home Box Office, benefit 
ATT's future credit profile. 

ATT and Warner Media will benefit from the stability, recurring dual-stream 
revenue profile, high operating margin and FCF generation of the cable networks 
businesses. 

Leading Content Creator: The ratings incorporate the strong competitive position 
of Warner Media's film and television studios at Warner Bros. The size and scale 
of Warner Bros.' television studios enables ATT and Warner Media to capitalize 
on strong demand for television content, while providing meaningful 
diversification of revenue sources. As Warner Bros.' videogames business grows 
it also adds to this diversification.

Derivation Summary

ATT's rating reflects a large scale of operations, diversified revenue streams 
by customer and technology, and relatively strong operating profitability. 
Current leverage is moderately high for the rating. The company's principal 
competitor is Verizon Communications Inc. (A-/Stable), as both companies compete 
head to head in the wireless and business services segments, where they are 
among the largest operators. 

In wireless, ATT faces competition from Sprint Corporation (B+/Rating Watch 
Positive) and T-Mobile US, Inc. (BB+ EXP /Stable), and a host of smaller 
regional carriers. Fitch believes the combined T-Mobile/Sprint will have greater 
resources to compete in developing areas, such as the deployment of a nationwide 
5G network and corresponding service offerings. The merger increasingly looks 
like it will be completed, as the state attorneys general challenging the merger 
lost in federal court (but could still appeal the case and the companies also 
still need the approval of California regulators). 

In the enterprise business, in addition to Verizon, ATT faces competition from a 
number of carriers, such as CenturyLink, Inc. (BB/Stable). Following 
CenturyLink's late 2017 acquisition of Level 3 Financing, Inc., the company 
became similar in size to Verizon, and is the second-largest enterprise service 
provider by revenue. Cable operators are strong competitors in the residential 
and small business segments for voice and data services, in addition to 
competing with DIRECTV Holdings LLC in the video-distribution business. 

ATT has similar business offerings to European peers but does not compete 
directly with its counterparts. These carriers include Deutsche Telekom AG 
(BBB+/Stable), Vodafone Group Plc (BBB/Stable), Orange S.A. (BBB+/Stable) and 
Telefonica SA (BBB/Stable). ATT, with more than $163 billion in revenue in 2019, 
is materially larger than the largest of these peers, Deutsche Telekom. ATT has 
lower leverage than European peers, in line with a higher rating. 

Based on an assessment of ATT's financial flexibility, Fitch assigned the higher 
of the two short-term options 'F1' for the current rating profile. Any material 
weakening in financial flexibility, financial structure or operating environment 
conditions could lead to the assignment of the lower of the two short-term 
rating options 'F2' for the current long-term profile.

Key Assumptions

--ATT's revenue grew approximately 6% in 2019, owing to the full year of results 
of WarnerMedia. The following three years in the revenue forecast incorporate 
annual revenue growth of approximately 1%, reflective of competitive intensity 
in certain segments offset by growth in wireless services, WarnerMedia and 
Xandr;

--EBITDA margins are forecast in the low-30% range initially and in the mid-30% 
range by 2022; 

--Stock repurchases began in fourth-quarter 2019 and Fitch assumes repurchases 
increase in 2020. ATT initiated an accelerated stock repurchase program for 
approximately $4 billion beginning in January 2020. Fitch estimates 
approximately two thirds of forecast cash flow is used for stock repurchases;

--Improved FCF prospects lead to a combination of continued debt repayment and 
stock repurchases in 2020 and the following two years; 

--Fitch estimates consolidated capital investments are approximately $20 billion 
annually. 

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating 
Action

--Fitch believes a positive rating action is unlikely for ATT in the foreseeable 
future, given the leverage incurred during the Time Warner acquisition.

Developments That May, Individually or Collectively, Lead to Negative Rating 
Action

--Fitch may take a 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 resulting in gross core telecom leverage rising 
above 2.5x, or FFO-adjusted net leverage of 3.3x, such as another material 
acquisition or stock repurchases, could lead to a negative action in the absence 
of a strong commitment to delever.

Liquidity and Debt Structure

Strong Liquidity Profile: ATT did not have any drawings on its revolving credit 
facilities (RCF), as of Sept. 30, 2019 (the company has not yet filed its 10-K). 
ATT has two RCFs: a three-year $7.5 billion RCF in place through December 2021 
and a five-year $7.5 billion RCF in place through 2023. The principal financial 
covenants for the RCFs require net debt/consolidated EBITDA as defined, to be no 
more than 3.5x. On Dec. 31, 2019, cash and cash equivalents totalled $12.1 
billion.

The company's 2019 capital investment was approximately $23.7 billion including 
FirstNet spending; in addition to capex, capital investment includes vendor 
financing payments. ATT provides the broader capital investment figure since 
vendor financing payments are excluded from capex for reporting purposes and are 
included in financing activities. Fitch expects FCF in 2020 to approach $15 
billion, which includes vendor financing payments in capital investment. 

Debt Maturities: On a consolidated basis, ATT and its subsidiaries expected debt 
maturities, excluding put-able debt, of approximately $8.5 billion in 2020.

Summary of Financial Adjustments

Adjustments for outstanding equipment installment plan receivables related to 
financial services operations (assessed using a debt-to-equity ratio of 5x) 
resulted in a reduction of the level of debt used in calculating our leverage 
metrics by approximately $12.5 billion (YE 2018). Fitch added back off-balance 
sheet securitization debt ($6.5 billion) before determining the reduction. Fitch 
also added back to debt in its forecast receivables sold related to 
WarnerMedia's programming and advertising receivables in 2019.

Date of Relevant Committee

04 December 2019

ESG Considerations

Unless otherwise disclosed in this section, the highest level of Environmental, 
Social and Governance (ESG) credit relevance is a score of '3' - ESG issues are 
credit neutral or have only a minimal credit impact on the entity, either due to 
the nature or the way in which they are being managed by the entity.

For more information on our ESG Relevance Scores, visit 
www.fitchratings.com/esg.

Contacts: 

Primary Rating Analyst

John Culver, CFA

Senior Director

+1 312 368 3216

Fitch Ratings, Inc.

One North Wacker Drive 

Chicago 60606

Secondary Rating Analyst

William Densmore, 

Senior Director

+1 312 368 3125

Committee Chairperson

David Peterson, 

Senior Director

+1 312 368 3177

 

Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: 
elizabeth.fogerty@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Hybrids Treatment and Notching Criteria (pub. 11 Nov 2019)

https://www.fitchratings.com/site/re/10100477

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Sector Navigators (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023790

Short-Term Ratings Criteria (pub. 02 May 2019)

https://www.fitchratings.com/site/re/10073011

Additional Disclosures 

Solicitation Status 

https://www.fitchratings.com/site/pr/10110751#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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