SBC Communications Inc. & SBC Communications Capital Corporation: Rates at A (high)p & R-1 (middle)p

Peter Schroeder; Chris Diceman, CFA/416-593-5577 ext.2279, ext.2242/ps@dbrs.com

 

“p” indicates rating is based on public information only.

 

DBRS has assigned a new rating of A (high)p to the long-term debt of SBC Communications Inc. (“SBC” or the “Company”) and SBC Communications Capital Corporation, and a rating of R-1 (middle)p to the Commercial Paper program of SBC, all with Stable trends.  The ratings pertain to the debt issued at the corporate level. 

 

SBC is dominant in 13 states, making it the second largest incumbent telco.  It is able to bundle its traditional fixed-line voice with broadband services.  This helps to limit churn and support a more aggressive push into new video and broadband services.  This includes a recent partnership with EchoStar Communications Corporation (“EchoStar Communications”).  These initiatives are key as it attempts to stem significant access fee and line erosion due to wireless substitution, declining second line usage, and increasing competition (UNE-P wholesale access).  As well, competition for residential services from cable providers will grow as the cable industry launches competitive triple-play bundles over the next five years.  The ratings also reflect other industry-wide risk factors, including: (1) state and federal regulation that hobbles market-driven evolution; and (2) evolving technology that forces competitive change that is not necessarily in sync with regulatory change. 

 

SBC’s substantial size and robust balance sheet yield credit ratios well above industry averages, including cash flow-to-debt of 0.62, EBITDA interest coverage of 10.56 times, and a 32.5% debt-to-capital ratio as at September 2003.  SBC has tremendous financial flexibility with over $2.0 billion in annual free cash flow and a significant cash balance of just under  $5.0 billion.  This tremendous liquidity is able to support share buybacks, annual dividend increases, reduction in debt levels, and strategic investments.  SBC’s liquidity is expected to remain strong with free cash flow estimated at  $1 billion in 2004.  This is based on operating cash flow of $11.0 billion, capex of $5.5 billion, and dividends of  $4.5 billion. The decline in operating cash flow, which began in 2000, will continue going forward as current trends remain in place. If profitability from the changing product mix does not improve as new technologies are introduced, the Company may not fully recoup the value of the prior investments in fixed assets made over the years.  If this became significant, the Company could consider writing down some assets to better match the value of future cash flows.

 

SBC’s corporate rating of A (high)p, at the top of the range, is based in large part on its financial strength.  This is expected to continue unless there are difficulties stemming from line loss, reducing its financial strength.

 

 

Dominion Bond Rating Service Limited (DBRS) has published a full report that provides additional analytical detail.  To see this report, please click on http://www.dbrs.com/web/sentry?COMP=2900&DocId=132880.  If you do not have access to this document, please contact us at info@dbrs.com.