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Fitch Rates Verizon Communications' Proposed Note Offering 'A-'; Outlook Stable

January 30, 2014

CHICAGO --(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A-' rating to Verizon Communications Inc.'s (NYSE: VZ) proposed senior unsecured notes due 2054. VZ's Issuer Default Rating (IDR) is 'A-' and the Rating Outlook is Stable. Proceeds from the offering will to be used for general corporate purposes. KEY RATING DRIVERS --In February 2014 , VZ's proposed $130 billion acquisition of Vodafone Group, PLC's (Vodafone) 45% interest in Cellco Partnership (which does business as Verizon Wireless ) is expected to close. Shareholders of both companies have approved the transaction. The transaction remains subject to the approval of the High Court of Justice of England and Wales , and other closing conditions. --The acquisition pressures VZ's near-term credit metrics, pushing pro forma leverage at closing to approximately 2.7x. Subsequent to the close of the acquisition, Fitch expects VZ to materially reduce debt over the next few years. EBITDA growth, combined with debt reductions are expected to reduce leverage to approximately 2x by the end of 2016, which Fitch believes is appropriate for an 'A-' rating. --Fitch is cognizant that leverage will be outside an appropriate range for an 'A-' rating for several years. However, Fitch has a high level of confidence metrics will return to a level appropriate for the rating due to the company's strong position in the wireless industry and the significant cash flows generated by the wireless business, in combination with management's commitment to delever. Management's commitment to delevering has been shown in the past by the aggressive delevering following the acquisition of Alltel Corporation in early 2009. Other supporting factors include the absence of operations-related execution risk. --A key to debt reduction over the next several years will be the continued generation of strong FCF at Verizon Wireless (VZW). VZW's simple FCF (EBITDA less capital spending) in 2013 was approximately $24.8 billion . VZ's consolidated FCF (after dividends and capital spending but before distributions to Vodafone) was $16.3 billion in 2013, and Fitch estimates FCF will be at least 50% lower in 2014 as a result of transaction-related interest costs, higher dividend requirements due to the shares issued to Vodafone equity holders and higher cash taxes. --The strong competitive position of VZW as evidenced through industry low churn rates, high margins and the most developed LTE network in the U.S. support expectations for VZ's cash flow stability of VZ and the longer rating horizon embodied in the rating. VZ's gross leverage at yearend 2013 was 2.2x, with total debt at $93.6 billion . Consolidated cash balances of $53.5 billion on Dec. 31, 2013 include proceeds from the $49 billion of debt issued in September 2013 to finance the transaction, and as a result net leverage was only 1.0x. To finance the remainder of the transaction, VZ will draw on a $12 billion term loan. The term loan's principal financial covenant requires leverage to be 3.5x or less but falls away upon achieving 'A-' ratings as defined in the agreement. VZ's liquidity is supported by a $6.2 billion credit facility, and Fitch expects the company to maintain aggregate CP balances within a level fully backed by the facility. The credit facility has no ratings triggers or other restrictive covenants, such as leverage or interest coverage tests. In August 2013 , the facility was extended for a year and now matures in August 2017 . After the effect of letters of credit (LOCs), approximately $6.1 billion is available on the facility. In October 2013 , VZ entered into a $2 billion 364-day revolving credit facility, which may be drawn upon after the wireless transaction closes. The 364-day facility has a 3.5x leverage covenant. On a consolidated basis, VZ and its subsidiaries have scheduled debt maturities of approximately $3.2 billion and $2.6 billion in 2014 and 2015, respectively. In 2014, Fitch expects consolidated capital spending to range from $16.5 billion to $17 billion , comparable to or slightly higher than the $16.6 billion spent in 2013. Investment in the wireless network continues to be an area of emphasis due to the strong demand for 4G LTE capacity for rapidly growing data services. RATING SENSITIVITIES A positive rating action could occur if: --Fitch believes a positive rating action is unlikely in the foreseeable future, given the leverage incurred in the Vodafone transaction. A negative rating action could occur if: --Operating performance causes delevering to take place at a materially slower than anticipated pace. --A weakening of VZW's competitive position that would jeopardize the stability of cash flows. Additional information is available at ' www.fitchratings.com '. Applicable Criteria and Related Research : --'Corporate Rating Methodology' ( Aug. 5, 2013 ); --'Rating Telecom Companies - Sector Credit Factors' ( Aug. 9, 2012 ). Applicable Criteria and Related Research : Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013 http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460 Rating Telecom Companies http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818351 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM '. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Primary Analyst John C. Culver , CFA Senior Director +1-312-368-3216 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 or Secondary Analyst Bill Densmore Senior Director +1-312-368-3125 or Committee Chairperson Mark Oline Managing Director +1-312-368-2073 or Media Relations: Brian Bertsch , +1-212-908-0549 ( New York ) brian.bertsch@fitchratings.com Source: Fitch Ratings


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