Ratings agency Moody’s has downgraded AT&T on concern about debts the operator has incurred to finance its share repurchase program.
Lowering the credit rating from A3 to A2, Moody’s says it believes the debt- financed program will result in “materially higher leverage for several years before it can be offset by organic growth”.
What’s more, although a recently announced boost to capital spending may help AT&T (Dallas, USA) to improve its competitive position alongside Verizon Wireless (New York, USA), it will not lead to an acceleration in earnings growth, according to Moody’s.
Although AT&T still aims to keep net debt to just 1.5 times earnings before interest, tax, depreciation and amortisation (EBITDA), it is likely to exceed this figure for a “sustained period”, in the view of Moody’s, and might eventually need to “formalize a higher leverage target”.
“We view the step up in leverage as semi-permanent,” said Moody's analyst Mark Stodden, based on AT&T’s indication that it will probably exhaust its current share repurchase authorization by mid-2013. “But even if AT&T stops or pauses the repurchase activity, spectrum purchases or tuck-in acquisitions are highly likely over the next few years, and leverage will probably stay above the company's formal target of 1.5x for a while.”
AT&T last week announced its purchase of spectrum licenses from Verizon Wireless for a cash fee of $1.9 billion plus some of its own frequencies.
The company has struggled to keep pace with Verizon Wireless on customer additions and is likely to face tougher competition from Sprint (Overland Park, USA), the country’s number-three player, and T-Mobile USA (Bellevue, USA), the fourth-biggest operator, in coming months.
Softbank (Tokyo, Japan) recently unveiled plans to spend about $20 billion on acquiring a 70% stake in Sprint, while T-Mobile USA is awaiting regulatory approval of its merger with MetroPCS (Richardson, USA), the number-five player.
It has also recently signed an agreement with Apple (Cupertino, USA) to begin providing the iPhone.
Moody’s says that growth at AT&T is limited because “the company is now so large that it cannot growth faster than the overall economy and its high market share precludes regulatory approval for any substantive M&A”.
The agency thinks debt incurred to finance the share repurchase and proposed acquisitions will increase AT&T’s leverage to between 2.3x and 2.5x EBITDA, but its forecast does not include debt-financed share repurchase beyond 2013.