Debt Risk Is Rising
Citing weaker business prospects thanks to cable's VoIP challenge, S&P has taken several ratings actions on big wireline players
Given what we view as a weakened risk profile for the wireline phone sector, Standard & Poor's Ratings Services took a number of rating actions on major players in the U.S. industry on Jan. 13, affecting a total of more than $100 billion of debt.
The long-term ratings on Verizon Communications (VZ ) and related entities, including majority-owned Cellco Partnership (which does business as Verizon Wireless), were lowered by one notch and removed from CreditWatch, where they were placed with negative implications February 14, 2005. The corporate credit rating was lowered to A from A+. The rating outlook is negative.
Separately, the corporate credit rating on MCI was raised to A from B+ and removed from CreditWatch, where it was placed with positive implications on February 14, 2005, based on its acquisition by the more creditworthy Verizon.
MORE UNCERTAINTY. Ratings for AT&T (T ; long-term corporate credit rating, A), formerly SBC Communications; BellSouth (BLS ; A); and CenturyTel (CTL ; BBB+) were placed on CreditWatch with negative implications, as were the ratings for Cingular Wireless (A ), which is jointly owned by AT&T and BellSouth, and Verizon's majority-owned Telecomunicaciones de Puerto Rico (BBB+). Potential downgrades for these five entities, if any, are unlikely to exceed one notch.
The wireline industry's weakened business position and the associated higher degree of uncertainty for cash-flow prospects in this sector primarily result from the challenge presented by voice over Internet protocol (VoIP)-based providers. In particular, many cable-TV companies, including all of the major players, are expected to actively market their VoIP offerings in 2006-07, packaging and integrating their voice services with their existing video and high-speed Internet services. The cable industry, as a whole, has a limited track record in offering phone service, but cable companies that have launched telephony have often garnered impressive market share.
For the wireline phone industry, the potential loss of customers to cable comes on the heels of the continuing customer losses due to wireless substitution. These concerns aren't new: When Standard & Poor's downgraded two of the three investment-grade regional Bell operating companies (RBOCs) in late 2004, we cited the threat to wireline as a major factor, and we've continued to cite these growing challenges in the negative outlooks or CreditWatch listings for these RBOCs.
TIMING IS KEY. Standard & Poor's recognizes that these wireline companies do maintain dominant share in residential voice. In addition, by increasing digital subscriber line (DSL) penetration and upgrading their systems (which will allow the phone companies to provide video services to at least some customers), the wireline companies can partially mitigate the VoIP/cable threat. Also, AT&T and BellSouth can market wireless services from their Cingular joint venture. Verizon and the new AT&T (formerly SBC) have diversified their revenue stream through their respective acquisitions of MCI and AT&T, and their percentage of revenue from the vulnerable residential voice sector will continue to decrease.
Nevertheless, the timing in executing these strategies is a key factor incorporated into the Jan. 13 rating actions: In the battle between phone and cable, the early advantage should go to cable.
Standard & Poor's views the potential for significant near-term loss of phone customers to cable as far greater than the loss of cable customers to phone companies. Given the needed technology choices and the time required to upgrade their infrastructure, it will take several years for the affected phone companies to offer video to a sizable portion of their customer base. In contrast, cable telephony, being economical and relatively easy to provide, will be offered on a widespread basis over the next couple of years.
ALREADY LOW ENOUGH. We recognize that over the longer term, the climate may change to become more favorable for phone and less so for cable: Beyond 2007, many wireline operators will be offering, to at least some material portion of their customer base, video service over their own networks, employing fiber or hybrid fiber systems using DSL variants to increase their network capacity. Unless the cable operators have succeeded in their mobile virtual network operator (MVNO) efforts, the phone companies would be offering at least a subset of their customers the more compelling four-service bundle.
We note that while the exacerbation of wireline business risk is viewed as a secular phenomenon, today's rating actions affect only investment-grade companies. The ratings on the speculative-grade companies that have major wireline exposure are deemed sufficiently low enough already to reflect this incremental business risk.
In resolving the CreditWatch listings for AT&T, BellSouth, CenturyTel, and Telecomunicaciones de Puerto Rico, Standard & Poor's expects to focus primarily on these companies' plans to meet the challenge of VoIP competitors (cable companies in particular). The rating reviews will examine strategies to counter the possible lower price points of packaged cable telephony or other providers, such as Vonage. Deep, broad-based price cuts by a wireline company could have a more damaging impact than maintaining price points and ceding limited market share to cable and other competitors.
Resolution of the CreditWatch listings will also entail these companies' plans (including technology choices, capital spending, and timing) to expand their broadband capacity and offer on-network video to compete head-on for cable and satellite customers. In addition, we will consider the prospects for Cingular in assessing the overall credit quality for AT&T and BellSouth. |
