AT & T Wireless Services Inc.: Rates at BBB (high)p

Chris Diceman, CFA; Rory Buchalter, CFA/416-593-5577 ext. 2242, ext. 2268/cdiceman@dbrs.com

 

 “p” indicates based on public information.

 

DBRS has assigned a rating of BBB (high)p to AT&T Wireless Services, Inc.’s (“AT&T Wireless” or the “Company”) Senior Unsecured Notes with a Stable trend.  This rating is supported by the Company’s: (1) size and economies of scale, being the third largest wireless carrier in the U.S. with 22 million subscribers; (2) strong balance sheet and favourable capital structure with a debt-to-capital ratio of 27% and $4.5 billion in cash on its balance sheet; (3) good operating cash flow growth which, along with lower capex levels, has allowed it to generate positive free cash flow for the first time in 2003; and (4) support agreements and brand equity of its former parent, AT&T Corporation.

 

This rating is based solely on the Company’s credit strength as a stand-alone entity.  However, rating actions could occur over the near term given that the Company is being sought by a number of suitors.  The effects of a merger would be incorporated into the Company’s rating once a transaction is finalized.

 

AT&T Wireless is independently expected to achieve good operating cash flow growth in 2004 as it continues to: (1) experience good subscriber growth, albeit somewhat lower as it focuses on profitable subscriber growth; and (2) stabilize and possibly improve average revenue per user (ARPU) levels with data revenue offsetting lower voice revenue per minute.

 

However, the Company has experienced higher churn levels in recent quarters, with more contracts expiring, difficulty in implementing a new CRM system, and wireless number portability being implemented in November 2003.  Churn related to the information technology (IT) system upgrade is not expected to have a long-term impact on AT&T Wireless’ operations, but wireless number portability could pressure churn levels for the Company in 2004.

 

Number portability has further motivated AT&T Wireless to improve its: (1) network coverage; (2) call quality; (3) customer service; and (4) marketing and retention initiatives.  These operational improvements will be critical to lower churn levels in a highly competitive market.

 

In addition, the Company will need to make considerable progress on transitioning its subscriber base as well as its billing and back office systems to its GSM network over the next two years.  This migration will remain of key importance for the Company to: (1) achieve improved EBITDA margins with lower acquisition and operational costs; and (2) drive ARPU growth through data usage like m-Mode.  The Company’s rating could improve if it successfully implements these operational improvements and makes significant progress on its network transition.

 

In 2004, the Company is expected to continue to generate free cash flow, but will likely be flat as higher capital intensity is expected to offset operating cash flow growth.  Capex levels in 2004 will be focused on:  (1) improved network coverage and quality (as mentioned above); (2) expanding its EDGE network for faster data speeds; and (3) completing its 850MHz GSM roll-out.  In 2004, the Company is expected to roll-out 3G services in four cities.  This roll-out will remove NTT DoCoMo Inc.’s right to put its interest back to AT&T Wireless and thus avoid a potential massive share repurchase obligation.

 

 

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=135082.  If you do not have access to this document, please contact us at info@dbrs.com.