S&P may cut ratings on $80 bln US telecom debt
Reuters, 03.26.04, 2:41 PM ET
NEW YORK, March 26 (Reuters) - Competition from cable and long-distance companies could lead to ratings downgrades at U.S. regional bell operating companies even if they move to shore up their balance sheets, Standard & Poor's said on Friday.
About $80 billion of debt at the regional bells and their wireless affiliates could suffer ratings cuts, S&P warned.
"No matter how you slice it, the telecom space does not have a lot of growth overall, and you just have more competition," S&P managing director Richard Siderman said. "With this much uncertainty and with this amount of challenge, to have a high "A" rating longer-term is going to be very difficult," he added.
Regional bells Verizon Communications Inc. (nyse: VZ - news - people), SBC Communications Inc. (nyse: SBC - news - people) and BellSouth Corp. (nyse: BLS - news - people) are rated "A-plus" by S&P, its fifth-highest investment grade out of 10.
The bells have seen their local telephone sales slide as competition mounted and customers switched to cellular phones and electronic mail.
Now, telephone products being rolled out by cable companies are probably the biggest new threat facing the regional bells, Siderman said.
So-called voice over Internet protocol, or IP, which carries speech over the Internet, has given cable companies an economical way to deliver telephone service, Siderman said.
"With cable companies' modem product perhaps maturing in a couple of years, I think they will be looking for a new revenue stream," he said.
Ratings for the regional bells are unlikely to fall below the "single-A" category, however, Siderman said.
"All these regional bell operating companies maintain solid business positions and dominant market shares," Siderman said. "However, it is clear that incrementally, their business positions have weakened significantly."
S&P on Friday put its ratings on Verizon Communications Inc. and Verizon Wireless on review for downgrade. Ratings for SBC Communications, BellSouth Corp. and their Cingular Wireless affiliate were already on review for downgrade by S&P.
Verizon said that S&P's decision to consider a downgrade was unwarranted, noting that it had cut total debt by more than $18 billion over the last two years.
Business risk, however, will likely be the deciding factor for the ratings, Siderman said.
"If we see business risk getting more intense over the next couple of years, the balance sheet improvement may not be able to offset that," he said.
BellSouth, SBC and Cingular have more downside risk than Verizon because of debt being taken on to acquire AT&T Wireless Services Inc. (nyse: AWE - news - people), Siderman said. Cingular, a joint venture of SBC and BellSouth, last month won an auction for AT&T Wireless with a $41 billion offer.
A decision on Verizon's rating is likely over the next two to three months, Siderman said. Rating actions on BellSouth, SBC and Cingular may take longer because of the pending AT&T Wireless acquisition, he said.
Verizon Global Funding's 7.25 percent notes due 2010 traded at 1.45 percentage points more than Treasuries, about 0.06 percentage point wider on the day, according to MarketAxess. |
