Science & Technology
Science and Technology
Science and Technology 
Thu, October 27, 2011
Fitch Rates Verizon Communications' Proposed Debt Issue 'A';; Outlook Stable
NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has assigned an 'A' rating to Verizon Communications, Inc.'s (Verizon) (NYSE: VZ) proposed offering of senior unsecured notes. The proceeds will be used to repay all or a portion of $3.45 billion of VZ and operating subsidiary debt due in 2012 and 2013 prior to maturity and, depending on the size of the offering, to repay up to approximately $1.8 billion of commercial paper (CP) outstanding. The Rating Outlook is Stable.
VZ's ratings reflect the significant scale and scope of the company's domestic wireline and wireless businesses; the high proportion of revenues from wireless and wireline growth areas; and the ability to manage leverage around a range of 1.5 times (x)-1.6x. An important component of VZ's ratings is the expectation for continued relatively strong growth in Verizon Wireless' (VZW) revenue, EBITDA, and free cash flow (FCF). In the first nine months of 2011, the domestic wireless segment produced approximately 63% of total consolidated revenues. Over the next several years, Fitch expects VZW's contribution to consolidated revenue and EBITDA to continue to increase through continued subscriber and service revenue growth, particularly from wireless data services.
As calculated by Fitch, gross leverage was 1.55 times (x) for the latest 12 months (LTM) ending Sept. 30, 2011; for the same period, net leverage was 1.26x. Cash balances were higher than normal as VZW retains cash in anticipation of a $10 billion distribution to its partners in January 2012. The support for the distribution is provided by VZW's strong FCF generation. Over the LTM ending Sept. 30, 2011, VZW's simple FCF (EBITDA less capital spending) was approximately $17.4 billion.
Concerns include the ongoing competitive pressures in the residential wireline market from wireless substitution and cable telephony competition, and the effect of the slow economic recovery on revenues from business and residential customers.
There is event risk regarding VZ's potential acquisition of Vodafone Group Plc's (Vodafone) 45% interest in VZW, as there would be concerns with regard to its initial outlay and financing. At the current time, the companies appear strongly committed to the partnership. VZW plans to pay a $10 billion distribution to VZ and Vodafone in January 2012. In Fitch's view, the distribution will not have an impact on the credit profile of VZ or VZW. The distribution does not include expected tax distributions to the partners that may occur in 2012. VZ has indicated that the distribution is one-time in nature, and that a future distribution will not be considered until the second half of 2012.
At Sept. 30, 2011, VZ had $54.9 billion in debt on a consolidated basis, and of this, $8.6 billion matures within one year. VZ's CP issuances are backed by a $6.2 billion credit facility, and Fitch expects the company to maintain aggregate CP balances within a level fully backed by the facility. The credit facility has no ratings triggers or other restrictive covenants, such as leverage or interest coverage tests. The three-year facility matures in October 2014. After the effect of letters of credit (LOCs), approximately $6.1 billion is available on the facility. In the LTM ending Sept. 30, 2011, FCF after dividends and capital spending was approximately $7 billion, and at Sept. 30, 2011, VZ had approximately $10.3 billion in cash. On a consolidated basis, VZ and its subsidiaries have debt maturities of approximately $0.9 billion and $5.8 billion in 2011 and 2012, respectively.
In 2011, consolidated capital spending is expected to be flat with 2010 levels, when spending totaled approximately $16.5 billion. In 2011, wireless capital spending of approximately $8.9 billion is expected, an increase from the $8.4 billion spent in 2010. The main contributor to wireless spending in 2011 is expected to be the continued buildout of the 4G wireless network as well as to increase capacity in its 3G network. VZ is not expected to repurchase common stock in the near term, as debt reduction remains a priority for the use of FCF.
Additional information is available at '[ www.fitchratings.com ]'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Rating Global Telecoms Companies' (Sept. 16, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]
Rating Global Telecoms Companies - Sector Credit Factors
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205 ]
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