|[November 21, 2012]
Fitch Affirms TDS' Ratings at 'BBB' Outlook Negative
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'BBB' Issuer Default Ratings (IDRs) and
long-term debt ratings of Telephone and Data Systems, Inc. (TDS) and its
subsidiary United States Cellular Corp. (USM). USM's ratings consider
the consolidated ratings at Telephone and Data Systems, Inc. (TDS). The
Rating Outlook on both entities is revised to Negative from Stable.
The affirmation reflects TDS' solid financial profile that has afforded
the company some flexibility to withstand operating challenges at its
current rating category. TDS has a good cash position, undrawn committed
revolver lines, no material maturities in the next 20 years and a
significant level of other assets that could be monetized.
The revision in Outlook reflects Fitch's longer-term concerns with the
wireless operations. Postpaid subscriber additions at USM have been
under material pressure for nearly three years. During 2012, the company
reported postpaid net losses that are materially worse than Fitch
expectations. USM has begun to improve traction with share gains and
positive year-over-year postpaid gross addition trends during the past
couple of quarters. However, churn has increased approximately 20 basis
points as a result of the competitive intensity, lack of iPhone (News - Alert), and
USM has taken steps to address these operational shortfalls with the
divestiture of the Chicago and St. Louis markets, new branding campaign,
targeted churn initiatives and broader third-party distribution. The
sale of the wireless markets to Sprint (News - Alert) Nextel will benefit the company's
operating profile by improving profitability and cash flows, reducing
capital spending, and improving past negative subscriber trends. As a
result, the sale of these underperforming markets should provide better
transparency with USM's operations in its remaining more mature markets
where the company has achieved better penetration.
However, the sale of wireless assets also represents a retrenchment of
its strategic plans and USM's inability to compete against the national
operators despite being in the Chicago market for over 10 years. The
competitive environment will also only get more challenging in the
future. Verizon (News - Alert) Wireless and AT&T Wireless have continued to strengthen
their position against the rest of the industry through spectrum
acquisitions and increased subscriber penetration to drive greater
revenue and cash flow share. Verizon Wireless' early advantage with 4G
LTE coverage and new share data plans has resulted in material share
gains during 2012. T-Mobile (News - Alert) and Sprint have also taken significant steps
to improve their competitive positions longer term.
USM's increased distribution through Walmart should help further improve
USM's gross addition trends as the company was more heavily reliant on
distribution through company-owned stores versus its national peers.
Fitch believes USM could pursue other initiatives to broaden its
distribution mix although subscribers acquired through third-party
channels are typically less profitable, with higher churn
characteristics. Fitch also believes the lack of iPhone distribution
creates a material competitive disadvantage relative to the national
USM also has exposure longer term to declines from ETC revenues, which
is a higher margin revenue source. USM had received in excess of $150
million of ETC revenue at its peak. Going forward, ETC revenue subsidies
received by USM are subject t reform plans by the FCC, as payments are
scheduled to be reduced 20% annually. These reductions began in mid-2012.
Longer term, Fitch believes TDS' ability to grow revenues and cash flows
while competing effectively against much larger national operators is
key to maintaining its investment grade ratings. Fitch acknowledges the
steps the company has taken to improve its operating profile and
profitability. However, Fitch remains concerned with the company's scale
and competitive position. A failure by TDS to demonstrate the ability to
sustain improved operating performance across its wireless and wireline
segments would lead to a negative rating action.
TDS' has good financial flexibility because of its cash, committed
credit lines and other assets. At the end of third-quarter 2012, TDS'
consolidated cash balance was approximately $589 million. TDS also has
$181 million of added liquidity in longer-dated treasury or
treasury-backed securities. TDS and USM maintain approximately $700
million of undrawn revolver capacity, principally through TDS' $400
million revolving credit facility and USM's $300 million revolver, which
both mature in December 2015. The principal covenant contained within
the facility is a consolidated leverage ratio of 3.0x, which allows the
company considerable flexibility.
Consolidated free cash flow (FCF) which had previously been at least
$200 million the past three years was a deficit of $86 million for the
last 12 months. This was due in part to capital spending that has peaked
at over $1 billion as a result of USM's LTE expansion, growth related to
wireline projects and the new wireless billing system. Looking forward,
Fitch expects FCF levels in 2013 could be flat to moderately negative
due to the continued high level of capital investment, decommissioning
costs related to the Chicago/St. Louis markets and higher cash tax
payments in 2013 as the benefit for bonus depreciation reverses. TDS
will benefit by avoiding the significant capital investment that would
have been required in the Chicago/St. Louis markets.
TDS does not have any significant maturities until after 2030. For the
last 12 months, TDS' consolidated leverage of 1.4x and interest coverage
of 11.0x were strong for its rating category, as ratings remain
constrained by subscriber trends, competitive environment and lack of
TDS has other sizable assets that could be monetized, including USM's
cellular towers and a 5.5% minority interest in Verizon Wireless' Los
Angeles partnership, although a sale of the partnership interest could
potentially affect the ratings depending on the use of the proceeds. The
cash generation from these assets accounts for a material portion of its
cash from operations at approximately 10%.
TDS has been active with share repurchase programs at both TDS and USM
in the past. As of Sept. 30, 2012, TDS and USM had not repurchased any
shares. TDS' current share repurchase program expired in November 2012.
Fitch expects TDS' board will authorize a new share repurchase program.
USM has authorized up to 1.3 million shares to be repurchased on an
WHAT COULD TRIGGER A RATING ACTION
Negative: The ratings have a Negative Outlook. Future developments that
may individually or collectively lead to a negative rating action
--A further erosion in the operating performance of the wireless segment
due to negative postpaid subscriber trends associated with competitive
pressure on churn or gross additions. Fitch must see an improved
performance in gross addition and churn trends that can be sustained
over this Outlook period as the company has taken initial steps to
improve this deficiency.
--TDS must demonstrate progress toward improved profitability across the
wireline and wireless operations that can be sustained for the longer
term. A failure to accomplish this would be a further concern.
--Negative growth trends in Wireless revenue if ARPU growth slows and/or
wireless net additions are negative thus further pressuring cash flows.
--Improvement in future FCF expectations beyond 2013.
--TDS undertakes more aggressive share repurchase activity, potentially
from shareholder pressure, thus weakening its liquidity position.
Positive: Fitch believes that competitive factors, current subscriber
trends and the company's relative position in the wireless industry
would not likely allow for a positive rating action at this time.
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. 8, 2012);
--'Rating Global Telecom Companies: Sector Credit Factors' (Aug. 9,
Applicable Criteria and Related Research:
Corporate Rating Methodology
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