Cingular Wireless LLC: Places Under Review with Negative Implications

Chris Diceman, CFA; Paul Holman /416-593-5577 ext. 2242, ext.2234/cdiceman@dbrs.com

 

“p” indicates based on public information.

 

DBRS has placed the credit ratings of Cingular Wireless LLC (“Cingular” or the “Company”) “Under Review with Negative Implications” following its announcement that it will acquire AT&T Wireless Services Inc. (“AT&T Wireless”) for about $41 billion in cash.

 

Cingular will fund the acquisition using AT&T Wireless’ $5 billion in cash that should be on hand by year-end and $36 billion in funding from its parents, SBC Communications Inc. (“SBC Communications”) and BellSouth Corporation (“BellSouth”).  The parent companies have not indicated how the $36 billion will be transferred to Cingular, nor have they advised on the cash income associated with this funding.  SBC has indicated that its 60% portion, or about $22 billion, will be funded with cash on hand, divestment proceeds, and about $10 billion to $13 billion in new capital, which could lead to higher debt levels.  BellSouth has indicated that its 40% portion, or about $14 billion, will be funded with cash on hand and about $10 billion in new capital, which could also lead to higher debt levels.

 

Cingular’s rating will be based on the combined operations and the costs associated with the $36 billion in inter-company funding provided by its parents.  The latter point will be a key issue for Cingular, as well as SBC and BellSouth, in allocating the financial risk for the acquisition funding.  For example, if Cingular received a large equity infusion from its parents, the additional financial risk would be minimal.  In this case, depending on how well the operations are combined and perform, the range for the credit rating of the combined company would be in the BBB (high) to A (low) range.  Alternatively, if Cingular borrowed the entire amount of $36 billion from its parents at current market rates, there could be additional pressure on the credit rating. 

 

DBRS will provide further commentary on the credit implications of this proposed transaction once the necessary offering documents have been filed.