Market sentiment has been improving for both companies, leading up to announcement that AT&T intends to buy DIRECTV in a deal valued at approximately
CDS liquidity has increased for both issuers since the beginning of May, most notably for AT&T, where CDS went from trading in the 26th regional percentile to the 14th. Increased CDS liquidity can be interpreted as growing market uncertainty over future pricing levels.
Fitch Ratings Monday placed the 'A' issuer default ratings (IDRs) and outstanding debt of AT&T and its subsidiaries on Rating Watch Negative. Fitch also placed the 'BBB-' IDR and outstanding debt ratings assigned to DTVH on Rating Watch Positive.
We believe AT&T's acquisition of DIRECTV will improve its financial flexibility owing to DIRECTV's strong free cash flows and the significant equity component in the transaction financing. The transaction also strengthens the company's position in the evolving video landscape, offering the potential to capitalize on trends for mobile video and over-the-top (OTT) video delivery. The acquisition also diversifies AT&T's revenue stream.
DIRECTV's video assets are complementary to AT&T's operations, but the longer term strategic benefits are less clear and depend on the post-merger company's ability to capitalize on emerging trends in the industry.
For DTVH, the Rating Watch Positive reflects AT&T's ownership of the company following the close and strong strategic ties. DTVH's final rating will depend on an evaluation of AT&T's financial policies with respect the DTVH's debt and the degree of linkage to AT&T's rating.
The transaction as it currently stands will likely lead to a one-notch downgrade of AT&T's rating to 'A-'. The rating could be affirmed at 'A' if the company's financial policies targeted leverage of 1.6x to 1.7x by 2016.
For additional information, visit our website at www.fitchratings.com.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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Source: Fitch Ratings
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