DBRS New Issue - BellSouth Corporation
Dominion Bond Rating Service (“DBRS”) has assigned a rating of Ap to BellSouth Corporation’s (“BellSouth” or the “Company”) recent US$400 million 5.2% Senior Unsecured Notes issue that mature in 2016. The trend is Stable.
The proceeds from this issue will be used to refinance the redemption of its US$400 million 6.75% 2033 BellSouth Telecommunications debentures that will be redeemed by the Company on January 18, 2005. Despite the modest shortening of the Company’s duration of debt obligations as a result of this transaction, DBRS believes that the interest cost savings will create a more tangible, albeit relatively small, benefit to the Company’s credit profile.
Despite the addition of US$6 billion in debt from a US$14 billion equity injection that BellSouth provided to Cingular Wireless LLC (“Cingular”) for its transaction to acquire AT&T Wireless Services Inc. in late October 2004 (which as a result, DBRS downgraded BellSouth from A (high)p to Ap on November 1, 2004), DBRS believes that BellSouth will maintain the ability to reduce debt levels over the medium term with reasonable, albeit lower, free cash flow compared to 2004 and 2003 levels.
Additionally, DBRS believes that in the longer term both BellSouth and SBC Communications Inc. could potentially receive a return of funds from Cingular in the form of a dividend, return of capital, or reduction in inter-company debt depending on its performance over the next few years, which would mark the beginning of this investment providing a direct financial reward for both parents.
Bellsouth’s free cash flow generation and debt reduction will be critical over this timeframe given:
(1) An environment that is expected to remain competitive for fixed-line services - cable and VoIP operators in 2005 and 2006; despite
(2) Reduced near-term pressure on local access lines as the Federal Communications Commission (“FCC”) recently confirmed its reversal of the UNE-P model – this will likely lead to competitors following AT&T Corporation’s abandonment of traditional fixed-line efforts in the consumer segment.
As a result, DBRS believes that BellSouth can maintain its current rating in this environment, but any sizeable deviation could result in ratings pressure.
Note:
p - This rating is based on public information.