DBRS Conf BellSouthCorp at Ap, R-1(low)p Rt BellSthTel at Ap

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of BellSouth Corporation (“BellSouth” or the “Company”) as indicated above at R-1 (low)p and Ap. In addition, DBRS has extended its ratings to BellSouth’s legacy debt issuer, BellSouth Telecommunications, Inc., which due to limited financial disclosure effectively carries the same rating as BellSouth and is based on BellSouth’s guarantee.

BellSouth’s credit profile remains relatively stable at the “A” level after being downgraded from A (high)p last year due to higher leverage and prolonged pressure on its core wireline operations. While the competitive pressure is expected to continue, BellSouth’s long-standing telecom franchises will continue to generate strong cash flow and debt levels are expected to be reduced over the next couple of years.

Competitive pressure from new technologies and a shifting product mix will continue to pressure BellSouth’s core operations and its historically strong EBITDA margins (over 45%). The declining number of retail customers remains a key issue. Going forward, competition is expected to come from attractively priced voice services (VoIP) provided by cable operators.

To counter these threats, BellSouth has responded in several ways:
(1) It is bundling wireline services with new services to grow revenue per customer and reduce customer turnover;
(2) It is transforming the network to a more efficient Internet Protocol (IP) based architecture. However, new services that are to be provided over this network, while helping to preserve revenue, will have lower EBITDA margins while the costs savings will likely take three to five years to achieve; and
(3) It is aggressively pursuing regulatory reform with the Federal Communications Commission (FCC) and state regulators.

While BellSouth’s EBITDA and cash flow have been trending downward, they still remain at substantial levels. As a result, DBRS feels the Company has the ability to reduce debt levels in 2005 and over the medium term. This should help to strengthen its credit metrics over this time frame, after debt rose by US$7 billion last year mainly to inject US$14.4 billion into Cingular to help Cingular fund the cash acquisition of AT&T Wireless.

While in the past BellSouth’s partial ownership of Cingular Wireless LLC [rated A (low)p, with a Negative trend – see separate report] has provided minimal financial return to its parents, the return of capital expected in 2005 (mostly from assets sales) is expected to aid BellSouth in reducing a portion of the additional debt assumed it in 2004. DBRS expects that as the integration at Cingular continues over the next couple of years, this valuable investment could begin to provide more regular cash flow to its parents.

Note:
p – This rating is based on public information.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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