Moody's affirms Verizon Communications <VZ.N> ratings
--From AOL. Some network costs included, plus a plug for CDMA.-- Cooters
Approximately $57 Billion of Debt Securities Affected
(Press release provided by Moody's Investor Service)
NEW YORK, Feb 2 - Moody's Investors Service has confirmed the long- and short-term debt ratings of Verizon Communications (Verizon), its supported affiliates, and all of its telephone subsidiaries.
The outlook for all ratings remains stable.
This rating action is based on Moody's expectation that Verizon Wireless (55% owned by Verizon), will successfully complete a partial IPO around mid-year, replacing short-term debt that will be incurred by Verizon and loaned to Verizon Wireless to fund Verizon Wireless' recent purchases of spectrum and assets.
Moody's rating action also reflects our belief that Verizon Communications will be able to sustain strong credit metrics despite accelerated spending on speed to market initiatives for its broadband data (DSL), wireless and long distance businesses.
The ratings also recognize that the "recapture" of Genuity (expected before mid-year 2005) is likely to stress the balance sheet. To capitalize on the longer-term potential of the developing wireless data opportunity and solidify its competitive position, Verizon Wireless recently expanded both its spectrum ownership and coverage.
While we are somewhat surprised by the amount that Verizon spent on this initiative ($8.8 billion in the C & F block auctions and $2.1 billion for the wireless assets of Price Communications) we still believe that the proceeds from a partial IPO of Verizon Wireless will be sufficient to meet the bulk of this very significant capital requirement.
Should this not be the case, Moody's will need to re-examine the appropriateness of the stable outlook and/or current ratings. Verizon Wireless, by far the largest wireless provider in the U.S., is expected to grow its operating cash flow as it accelerates its efforts to capitalize on robust demand growth.
Its cost structure benefits from an increasingly digital network (digital service reaches 75% of covered POPs and 51% of subscribers are on a digital rate plan) and is based on the most efficient and economical digital standard, CDMA.
The large national network footprint, covering over 90% of the population, minimizes roaming costs, which is increasingly important given the trend toward national service offerings.
In addition, strong distribution channels including a high percentage of low cost direct distribution, improving operating efficiencies and expanded purchasing power are expected to allow the company to offset accelerating competitive challenges and sustain cash flow margins close to 35% over the next couple of years.
Robust wireless demand growth is expected to be fueled in part by growing demand for wireless data services in addition to continued strong demand growth for wireless voice services. Consequently, Moody's expects wireless capital spending to average about $5.0 billion annually for at least the next few years.
Verizon's ratings reflect our expectation that Verizon Wireless' business model will be self-funding. We anticipate a continuation of strong operating and financial performance from domestic telephone operations, by far Verizon's largest asset, today providing in excess of 70% of consolidated EBITDA.
While competition is expanding rapidly and is taking retail market share, a growing wholesale business, overall market growth, including rapidly expanding broadband data demand (especially for DSL) and the opportunity to offer in region interLATA long distance services, should offset some of the competitive losses.
While margin improvement will be difficult given the speed to market initiatives and expanding competition, an increasingly efficient network design (which lowers both transport and maintenance costs), improving marketing initiatives, generally balanced regulatory relationships and ongoing improvements in operational efficiency (a large percentage of which should result from merger synergies and DSL related experience), should enable margins in this segment to remain strong.
We expect domestic telephone operations to grow cash flow about 5% annually over the next few years. Group capital spending is likely to continue trending upward in response to speed to market initiatives, efficiency and service quality driven investment and accelerating demand for broadband services.
However, we believe that this business segment will provide the parent company with over $5.0 billion in dividends annually. In order to comply with the long distance provision restrictions of the Telecommunications Act of 1996, Verizon was required to reduce its ownership in Genuity, GTE's internet infrastructure and services provider, to less than 10% until it opens Bell Atlantic's local markets to competition (thus gaining approval to offer interLATA services in these markets).
An IPO for 90% of Genuity was completed late last year. Verizon has an option to increase its ownership in Genuity back up to about 80% once it gains approval to offer long distance service throughout the former Bell Atlantic markets.
Genuity now anticipates that it will require up to $11 billion in capital (reduced from earlier expectations of up to $13 billion due to both new capital efficiencies and lower IT spending as a result of the economic slowdown) for network expansion through 2004.
In addition, Genuity will need to fund significant operating losses, which Moody's still estimates at close to $1.0 billion in 2001 and somewhat less in 2002. Moody's expects that this capital requirement will be debt financed.
Since we believe that the exercise of this option has a very high probability of occurring because the long-term financial potential of Genuity's rapidly growing businesses is very significant, we have overlaid a "recapture" of Genuity by Verizon in our ratings.
The recapture of Genuity will utilize a significant amount of the balance sheet flexibility that is available to Verizon at this rating level.
Moody's believes that a rationalization of international investments, including disposals of the Cable and Wireless Communications and Telecom Corporation of New Zealand stakes, is likely given the need to provide near-term support to the balance sheet.
We also believe that Verizon will continue to be disciplined in a further expansion of this segment, as its strategic priority is the domestic market.
In addition to the partial IPO of Verizon Wireless, Moody's ratings of Verizon are also based on our expectation that additional domestic acquisitions and any further stock repurchases will be very moderate in scope and that should new investment opportunities present themselves, they will be financed in a manner that preserves balance sheet strength.
Verizon Communications provides domestic are international wireline and wireless communications services and is headquartered in New York, NY.
11:56 02-02-01 |
