Rating Action: Moody's assigns Baa2 rating to AT&T's proposed senior unsecured global notes
Global Credit Research - 02 Sep 2020
New York, September 02, 2020 -- Moody's Investors Service ("Moody's") assigned a Baa2 rating to AT&T Inc.'s (AT&T) proposed senior unsecured notes to be issued in connection with its debt exchange offer for certain outstanding notes. The exchange offer will push out near and medium-term maturities on certain upcoming debt and will be leverage neutral.
..Issuer: AT&T Inc.
....Senior Unsecured Regular Bond/Debenture, Assigned Baa2
AT&T's Baa2 senior unsecured rating reflects materially improved credit metrics following a year of focused debt reduction in 2019 following the acquisition of WarnerMedia. Debt to EBITDA leverage with Moody's adjustments as of June 30, 2020, pro forma for recent tender offer activity, was approximately 3.5x. However, we expect credit metrics to weaken during 2020 due to the disruptions caused by the coronavirus outbreak. We anticipate that WarnerMedia's ad revenues and film and television businesses will be materially impacted by the economic contraction and the knock on effect on advertising and theatrical film revenues. As a result, share repurchases have been temporarily suspended and management has stated that it is focused on supporting its dividend payments and debt reduction to help mitigate the temporary negative impact on credit metrics. We expect wireless to be relatively stable, but subscriber losses at the company's pay TV business to continue to be outsized through 2020.
The company benefits from leading positions, important brands, scale and revenue diversity that collectively result in substantial qualitative credit strength. AT&T, a market leader in nearly all of its businesses, has valuable assets, predictable revenue, and healthy margins. Putting aside the impact from COVID-19, these qualitative strengths are offset by outsized shareholder returns, anemic top line growth and subscriber losses in several of its important segments. We believe the company is facing secular, competitive and transition pressures in its primary segments due to continued vulnerability from business disruption across its end markets. In addition, continued material net subscriber losses at both DIRECTV and the Turner networks, despite offsetting subscriber revenue growth at HBOMAX, could further limit financial flexibility and capacity relative to its credit ratings in the future unless mitigated with debt reduction. AT&T's financial policy is anchored by its growing common stock dividend. However, AT&T's dividend as a percentage of pre-dividend free cash flow has meaningfully improved after corporate tax reform and the completion of the WarnerMedia acquisition, decreasing to 46% as of year-end 2019 from 70% as of year-end 2017, giving management more discretion regarding the direction of the company's credit profile.
Social risks for AT&T can include a potential data breach event, where intellectual property and other internal types of sensitive records could be subject to legal or reputational issues. However, management monitors its social risks closely, including data protection, and workforce resource planning. AT&T's exposure to social risks also stem from technological evolution and demographic change that is altering consumer viewing habits and advertising trends. The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines have created a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The media sector has been one of the sectors moderately affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, AT&T's exposure to economically sensitive advertising revenues, the success of Warner Media's films in theatres which are now closed in parts of the world to limit the spread of the virus, and live-action film and television production which has largely been halted, have left it vulnerable in these unprecedented operating conditions and AT&T remains vulnerable to the outbreak continuing to spread.
AT&T's exposure to governance considerations reflects the company's financial strategies, which have the potential to become more aggressive again after the COVID-19 effects recede given its moderately levered capital structure, its previous intentions surrounding its three-year capital plan, its growing common stock dividend, and recent shareholder activism. The company achieved a company-calculated net debt to EBITDA target of around 2.5x for year-end 2019 (about 3.25x with Moody's adjustments), and prior to COVID-19, expected to reduce leverage by around a quarter of a turn or more lower over the next three years. From 2020 to 2022, the company commented that it expects to return $75 billion to shareholders through $30 billion of share retirements and $45 billion in dividends. These plans are now in jeopardy due to the ongoing effects from the crisis, however, Moody's viewed these shareholder return plans as credit negative in the face of a still high absolute debt load and significant capital investment needed to remain competitive for the long-term.
AT&T's stable outlook reflects our expectation for modest improvement in credit metrics over the next 18 months, with a temporary negative impact on operating performance in 2020 as a result of COVID-19. In addition, Moody's expects free cash flow will remain well in positive territory, the degree of structural subordination in the consolidated post-close capital structure will be managed down to pre-WarnerMedia merger levels and liquidity will remain robust enough to comfortably address upcoming debt maturities and all other business needs.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade AT&T's rating if fundamentals improve, particularly with regard to subscriber numbers, investment in 5G wireless and new TV services is competitive, leverage (with Moody's adjustments) falls and is sustained below 3x and free cash flow to debt remains stable (except during important investment cycles).
Moody's could downgrade AT&T's rating if free cash flow to debt declines or becomes negative or if Moody's adjusted leverage is above 3.5x, both on a sustained basis. In addition, worsening secular or other declining fundamentals and/or profit margins could reduce financial capacity and result in the need for stronger credit metrics for the Baa2 rating or could result in a downgrade of the company's debt ratings. There could also be ratings pressure if liquidity weakens and the company is viewed as facing moderate to high refinancing risks.
The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
AT&T Inc. (AT&T), the largest telecommunications company in the US, has its headquarters in Dallas, Texas. In June 2018 AT&T completed its merger with Warner Media, LLC, adding the global media and entertainment platforms of Warner Bros., HBO and Turner to its sizable mobile, video, and broadband customer relationships. AT&T generated $175 billion of revenue for the last twelve months ending June 30, 2020.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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Neil Begley Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Lenny J. Ajzenman Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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