AT&T;’s Credit Rating Is Cut
Moody’s Investors Service on Wednesday cut AT&T; Corp.’s credit rating to two notches above “junk” status, saying the largest long-distance telephone company will be challenged to boost revenue amid rising competition for its core business.
The cut triggers a rise in interest costs for AT&T;, which becomes the latest big telecom to suffer a credit-rating cut. No. 2 long-distance company WorldCom Inc. was cut to junk status by all leading U.S. rating companies, and Standard & Poor’s cut Qwest Communications International Inc., the No. 4 domestic local phone company, to junk. AT&T; now has the same rating as No. 3 Sprint Corp.
“The downgrade of a highly visible credit such as AT&T; highlights some of the big problems in the telecommunications sector, such as overcapacity and the lack of pricing power,” said John Boston, who oversees more than $1 billion as director of taxable fixed income for AmSouth Bank in Birmingham, Ala. He sold his AT&T; bonds last year.
Moody’s cut AT&T;’s senior unsecured debt two notches to Baa2 from A3. Its rating outlook is negative. Standard & Poor’s rates AT&T;’s senior debt BBB-plus, one notch above Moody’s new rating. AT&T; enjoyed AAA ratings in the early 1980s.
The downgrade, affecting about $25 billion of debt, sent AT&T; shares down 40 cents, or 3.2%, to a 10-year closing low of $12.01 in heavy trading on the New York Stock Exchange. The shares traded as low as $11.95. The price has fallen 34% this year.
Moody’s said the downgrade “reflects the weakened revenue prospects for the long-distance voice and data industry” and rising competitive pressures from the regional Bell operating companies BellSouth Corp., Qwest, SBC Communications Inc. and Verizon Communications Inc.
Regional Bells “will be extremely competitive” in long-distance, said Brad Dyslin, director of fixed-income research at Principal Capital Income Investors in Des Moines, which invests $40 billion but owns no AT&T; bonds. “Long-distance providers are severely disadvantaged. The advent of wireless and the Internet has taken away volume, and revenue that is not coming back.”
Sales of consumer long-distance telephone service at AT&T; and rivals such as WorldCom have slumped amid rising use of e-mail and mobile phones.
Long-distance call rates have dropped to as low as 2 cents a minute. “It’s a very, very competitive business; companies are practically giving away long-distance,” said John Cassady, who doesn’t hold AT&T; debt in the $4 billion he helps manage at Fifth Third Investment Advisors.
AT&T; spokeswoman Eileen Connolly said, “The downgrade will have no practical effect on the way we conduct our business. We do expect to improve our margins in our growth businesses, specifically data and managed services.”
But the reduction will cost AT&T.;
The company in November became the first U.S. issuer to agree to pay higher interest on its bonds if its credit ratings declined. A two-level downgrade by Moody’s may cost the phone company 0.5 percentage points on the $10.1 billion of bonds it sold at the time, analysts said.
“It will raise interest costs,” said Cory Jackson, an analyst who follows AT&T; debt at U.S. Bancorp Piper Jaffray in Minneapolis. “They definitely face a challenging environment.”
The coupon on the $2.75 billion of bonds due in 2031 would rise to 8.5% from 8%. The $2.75 billion of notes maturing in 2011 would carry a coupon of 7.8%, up from 7.3% at the time of the sale. A cut to junk could, under some conditions, allow bondholders to force AT&T; to buy back the entire $10 billion of bonds.
Chief Executive C. Michael Armstrong racked up $65 billion of debt to build AT&T; into the biggest U.S. cable television company and sell cable TV, phone and wireless services under one roof. Armstrong was forced to reverse that strategy as its business declined and its stock price tumbled.
In December, he agreed to sell AT&T;’s cable business to Comcast Corp. for $72 billion. That sale, while reducing debt, will leave AT&T; without one of its best-performing businesses, Moody’s analyst Robert Ray said.
AT&T; will have about $20 billion of debt after the cable sale. Much of AT&T;’s obligations don’t come due until 2006, 2011 and 2031.
