|[February 28, 2014]
Fitch Rates Verizon's $6.6B Term Loans 'A-'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has assigned an 'A-' rating to the following debt issues
for Verizon (News - Alert) 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 (News - Alert) 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 (News - Alert) 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 (News - Alert) 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 transation. 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,
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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