2008-11-09 04:50:01 -
- Fitch Ratings has downgraded the ratings of Verizon Communications Inc. (Verizon) (NYSE:VZ) as follows in anticipation of the close of the acquisition of Alltel Corporation (Alltel) by Cellco Partnership a Delaware general partnership doing business as Verizon Wireless (VZW).
--Long-Term Issuer Default Rating (IDR) to 'A' from 'A+';
--Senior unsecured debt to 'A' from 'A+';
--$5.6
billion bank facility to 'A' from 'A+'.
Fitch removed Verizon's ratings from Rating Watch Negative and has assigned a Stable Rating Outlook.
Fitch affirmed Verizon's short term ratings as follows:
--Short-Term IDR 'F1';
--Commercial paper (CP) 'F1'.
The ratings of Verizon's telephone subsidiaries were also downgraded. A detailed list of subsidiary ratings is at the end of this release.
In addition, Fitch has assigned ratings to the following Verizon Wireless entities, with a Stable Outlook:
Cellco Partnership
--IDR 'A';
--364-day facility due June 2009 'A';
--3-year term loan due September 2011 (co-issued with Verizon Wireless Capital LLC) 'A'.
Verizon Wireless Capital LLC
--IDR 'A';
--3-year term loan due September 2011 (co-issued with Cellco Partnership) 'A'.
The following Alltel Corp. ratings will remain on Rating Watch Positive:
Alltel Corp.
--IDR 'B';
--Senior unsecured debt 'CCC+/RR6';
Alltel Communications Inc. (ACI)
--IDR 'B';
--Senior secured bank credit facility 'BB/RR1';
--Senior unsecured debt 'B/RR4'.
After the close of the transaction, Fitch will upgrade Alltel's and ACI's IDRs and remaining debt to 'A' on the condition the terms of the transaction remain as proposed. Fitch will withdraw ratings on debt repaid.
The action reflects Fitch's expectation that VZW's proposed acquisition of Alltel Corporation (Alltel) is highly likely to close in the near term following the approval by the Federal Communications Commission (FCC) on Nov. 4, 2008. Aggregate consideration for Alltel is $28.1 billion, reflecting equity consideration of $5.9 billion and net debt of $22.2 billion expected at the time of the close of the transaction. VZW is expected to refinance Alltel's existing high-cost debt.
Verizon's and VZW's 'A' IDR and Stable Rating Outlook are underpinned by the continued strong growth at VZW of revenue, EBITDA and free cash flow. In the first nine months of 2008, VZW produced 51% and 59% of Verizon's consolidated revenues and EBITDA, respectively. VZW's contribution to consolidated revenue and EBITDA will increase materially through continued growth as well as through the Alltel acquisition. Although leverage upon the close of the transaction is expected to be above the range appropriate for the 'A' rating category, in the first year VZW's strong cash flow generation is expected to provide for approximately $10 billion of debt reduction at VZW (and more in the second year), returning Verizon's consolidated credit metrics to solidly within the 'A' rating category.
Also an important consideration in Verizon's rating is the access to cash generated by VZW through intercompany debt repayments, initially and prospectively through its 55% share of potential distributions. VZW, in which Vodafone Group Plc (Vodafone) has a 45% stake, currently distributes cash according to a formula based on revenues and profits for the purpose of offsetting the taxes on partnership income. As part of the transaction, Verizon and Vodafone agreed to an annual review of distributions, and distributions will be moderately increased in the first two years after the transaction.
A concern with regard to Verizon's rating is continued competition for voice services in the consumer wireline market. Fitch's view incorporates continued consumer voice revenue losses in the retail residential market, primarily to cable multiple system operators (MSOs) and wireless substitution. The effect of competition in the consumer voice market is mitigated by its moderate proportion of consolidated revenues. Consumer retail voice revenues (excluding the mass market customers of the former MCI), approximated 11% of consolidated revenues in the third quarter of 2008. Fitch is encouraged by the penetration rates Verizon is achieving on its fiber-to-the-premise network (FTTP) for both data and video services.
At Sept. 30, 2008, Verizon had $44.8 billion in total debt outstanding, which includes a total of $7.3 billion in CP, bank debt and long-term debt maturing within one year. Fitch expects Verizon to maintain aggregate CP balances within a level fully backed by a $5.6 billion credit facility, which expires in September 2009. The credit facility has no ratings triggers or other restrictive covenants, such as leverage or interest coverage tests. For the 12 months ending Sept. 30, 2008, free cash flow after dividends and capital spending was approximately $5.1 billion, and at Sept. 30, 2008, Verizon had approximately $700 million in cash. In October 2008, Verizon issued $3.25 billion of long-term debt, primarily to reduce CP balances.
On June 5, 2008, VZW entered into a $7.55 billion 364-day credit facility, and drew approximately $4.8 billion on the facility to acquire existing Alltel debt. In the third quarter of 2008, VZW drew $2.75 billion under the delayed draw portion to acquire Rural Cellular Corporation (Rural) and refinance Rural's debt. By the end of the third quarter of 2008, $1.6 billion of the facility had been repaid, and $4.44 billion was refinanced using proceeds from a three-year term loan facility, leaving approximately $1.5 billion outstanding under the 364-day facility.
Fitch has downgraded the following Verizon subsidiary ratings, removed all ratings from Rating Watch Negative, and assigned a Stable Outlook:
GTE Corp.
NYNEX Corp.
Verizon Delaware
Verizon California
Verizon Florida
Verizon Maryland
Verizon New England
Verizon New Jersey
Verizon New York
Verizon North
Verizon Northwest
Verizon Pennsylvania
Verizon Virginia
Verizon West Virginia
--IDR to 'A' from 'A+';
--Senior unsecured to 'A' from 'A+'.
GTE Southwest
--IDR to 'A' from 'A+';
--First mortgage bonds to 'A' from 'A+'.
Verizon Global Funding
--Senior unsecured to 'A' from 'A+'.
The following Rural Cellular Corporation ratings have been withdrawn, as all outstanding securities were repaid on Sept. 5, 2008:
--Long-Term IDR rated 'A+';
--$510 million secured notes (second lien) due 2012 rated 'A+';
--$325 million senior unsecured notes due 2010 rated 'A+';
--$175 million senior subordinated notes due 2012 rated 'A';
--$425 million senior subordinated notes due 2013 rated 'A'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings, Chicago
John Culver, CFA, +1-312-368-3216
Bill Densmore, +1-312-368-3125
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)
cindy.stoller@fitchratings.com 
