|By Business Wire||
|February 28, 2014 10:23 AM EST||
Fitch Ratings has assigned an 'A-' rating to the following debt issues for Verizon Communications Inc. (NYSE: VZ):
--$3.3 billion term loan due 2017;
--$3.3 billion term loan due 2019;
--$2 billion 364-day revolving credit facility due February 2015.
Fitch currently rates VZ's IDR 'A-' with a Stable Rating Outlook.
Proceeds from the term loans formed part of the $130 billion in consideration used to acquire Vodafone Group, PLC's (Vodafone) 45% interest in Cellco Partnership (which does business as Verizon Wireless) on Feb. 21, 2014.
KEY RATING DRIVERS
--The acquisition of the remaining Verizon Wireless (VZW) stake pressures VZ's near-term credit metrics, pushing pro forma leverage at closing to approximately 2.7x. Subsequent to the close of the acquisition, Fitch expects VZ to materially reduce debt over the next few years. EBITDA growth, combined with debt reductions is expected to reduce leverage to approximately 2x by the end of 2016. Fitch believes this level is appropriate for an 'A-' rating.
--Fitch is cognizant that leverage will be outside an appropriate range for an 'A-' rating for several years. That said, Fitch has a high level of confidence metrics will return to a level appropriate for the rating due to VZ's strong position in the wireless industry and the significant cash flows generated by the wireless business. This is in combination with Verizon management's commitment to delever, evident by the aggressive delevering following the acquisition of Alltel Corporation in early 2009. Other supporting factors include the absence of operations-related execution risk.
--A key to debt reduction over the next several years will be the continued generation of strong free cash flow (FCF) at VZW. VZW's simple FCF (EBITDA less capital spending) in 2013 was approximately $24.8 billion. VZ's consolidated FCF (after dividends and capital spending but before distributions to Vodafone) was $16.3 billion in 2013. Fitch estimates FCF will be at least 50% lower in 2014 as a result of transaction-related interest costs, higher dividend requirements due to the shares issued to Vodafone equity holders and higher cash taxes.
--The strong competitive position of VZW as evidenced by industry-low churn rates, high margins and the most developed LTE network in the U.S. support expectations for VZ's cash flow stability and the longer rating horizon embodied in the rating.
VZ's gross leverage at year-end 2013 was 2.2x, with total debt at $93.6 billion. Consolidated cash balances of $53.5 billion on Dec. 31, 2013 include proceeds from the $49 billion of debt issued in September 2013 to finance the transaction. As a result net leverage was only 1.0x.
VZ's liquidity is supported by a $6.2 billion credit facility. Fitch expects VZ 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. In August 2013, the facility was extended for a year and now matures in August 2017. After the effect of letters of credit (LOCs), approximately $6.1 billion is available on the facility.
The 364-day revolving credit facility has a 3.5x leverage covenant, as do the term loans. The term loans leverage covenant falls away upon achieving 'A-' ratings, as defined in the agreement. On a consolidated basis, VZ and its subsidiaries have scheduled debt maturities of approximately $3.2 billion and $2.6 billion in 2014 and 2015, respectively.
In 2014, Fitch expects consolidated capital spending to range from $16.5 billion to $17 billion, comparable to or slightly higher than the $16.6 billion spent in 2013. 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 believes a positive rating action is unlikely in the foreseeable future, given the leverage incurred in the Vodafone transaction.
Conversely, Fitch may take negative rating action if:
--Operating performance causes delevering to take place at a materially slower than anticipated pace;
--A weakening of VZW's competitive position that would jeopardize the stability of cash flows.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Telecom Companies
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