Fitch Ratings has assigned a 'BBB+' rating to AT&T Inc.'s offering of three-year senior unsecured notes.
AT&T intends to use the net proceeds of this offering to repay a portion of the amounts outstanding under its $2.5 billion term loan agreement entered into in November 2022, which matures in February 2025.
AT&T's ratings incorporate improvements in gross core telecom leverage following debt reductions in 2022 after the spin-off of the Warner Media business. Fitch expects FCF to improve in 2024 with an anticipated decline in capex. Longer term, AT&T is expected to benefit from the higher levels of capex incurred through 2023 in the wireless business as well as the continued deployment of fiber in the wireline businesses.
Key Rating Drivers
Large Scale and Diversification: AT&T is one of the largest telecommunications operators in the U.S. Its 'BBB+' Long-Term Issuer Default Rating (IDR) is underpinned by a diversified revenue mix, significant size and economies of scale. In 2021 and 2022, the company largely concluded a significant shift in its business to focus on wireless, business services and fiber to the home connectivity, after spinning off WarnerMedia and forming a venture with TPG Capital to hold its video distribution assets (still owned 70% by AT&T). While some diversification benefits are being lost, the spin-off of WarnerMedia has enabled AT&T to material delever and will be able to sustain investment in its key wireless and wireline businesses.
Delevering Path: Fitch calculated gross core telecom leverage on a preliminary basis at the end of 2022 was 3.3x (slightly higher than AT&T's net leverage calculation of 3.2x at year-end 2022). Fitch expects leverage to decline over the forecast horizon as the company estimates it will reach its 2.5x net leverage target (which does not reflect Fitch adjustments) in the 2025 timeframe. The company's free cash flow is expected to improve as capex moderates, beginning in 2024.
To determine core telecom leverage, Fitch applied a 4-1 debt/equity ratio to the company's handset receivables, after adding back off-balance-sheet securitizations related to the handset receivables. Fitch has also treated subsidiary preferred stock as debt (by removing the preferred stock from noncontrolling interests) given relatively limited coupon deferral periods relative to traditional hybrids and the potential for redemption in certain circumstances.
Spectrum Auctions: AT&T bolstered its mid-band spectrum position in 2021 and 2022. In the FCC's 3.45 GHz auction, concluded in early 2022, AT&T spent $9.1 billion and acquired the maximum 40 Mhz allowable by any one bidder. In the C-Band auction ending in early 2021, AT&T won licenses with a total value of $23.4 billion. AT&T acquired spectrum totaling about 80 MHz nationwide, including 40 MHz in the first phase. The first 40 MHz of spectrum became available after December 2021 after an accelerated clearing process, with the remainder available after December 2023.
Competitive Environment: The wireless market continues to be very competitive, with the three largest national operators (AT&T, T-Mobile US and Verizon) going head to head. DISH Network is a distant fourth national operator, in the process of building out a nationwide network.
Parent-Subsidiary Linkage: Fitch's approach equalizes the IDRs across the corporate structure, with high operational and legal incentives for certain wholly-owned subsidiaries with parent guarantees and with high strategic and operational incentives and low legal incentives for entities without a parent guarantee (primarily the mobile subsidiaries). Fitch links the IDR of DIRECTV Entertainment Holdings, LLC to AT&T Inc. DIRECTV's IDR is notched up one level from its standalone credit profile owing to low operational incentives, medium strategic incentives (due to DIRECTV's cash distributions) and low legal incentives.
Derivation Summary
AT&T's rating reflects a large scale of operations, diversified revenue streams by customer and technology, and relatively strong operating profitability. Current leverage is moderately high for the rating. The company's principal competitor is Verizon Communications Inc. (A-/Stable), as both companies compete head to head in the wireless and business services segments, where they are among the largest operators.
In wireless, AT&T faces competition from T-Mobile US, Inc. (BBB-/Positive) and a host of smaller regional carriers. The post-merger T-Mobile has aggressively deployed its nationwide 5G network and is expanding its service offerings.
In the enterprise business, in addition to Verizon, AT&T faces competition from a number of carriers, such as Lumen Technologies, Inc. (BB/Stable). Cable operators are strong competitors in the residential and small business segments for voice and data services.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer
For 2023-2025, Fitch assumes the core business, which now consists primarily of the mobility, consumer broadband and business wireline, grows in the low single digits;
EBITDA margins are forecast to be in the mid-30% range. Business unit margins for wireless are expected to be similar to the 40% achieved in 2022;
Fitch estimates consolidated gross capital investments are approximately $24 billion annually in 2023, similar to 2022, then decline to $20 billion annually;
Adjustments for outstanding equipment installment plan receivables related to financial services operations (assessed using a debt-to-equity ratio of 4x) resulted in a reduction of the level of debt used in calculating our leverage metrics by approximately $12 billion. Fitch added back off-balance sheet securitization debt before determining the reduction.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Gross core telecom leverage sustained below 2.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Gross core telecom leverage sustained above 3.2x;
Fitch may take a negative rating action, if the anticipated pace of delevering does not lead to gross core telecom leverage below 3.2x by the end of 2023;
An aggressive capital allocation policy, such as stock repurchases or a material acquisition, could lead to negative action in the absence of a strong commitment to delever;
Lower than expected EBITDA, as an outcome of competitive pressures, lower revenues from growth initiatives and weaker than expected cost controls.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Strong Liquidity Profile: AT&T did not have any drawings on its $12 billion revolving credit facility (RCF) as of Dec. 31, 2022. AT&T entered into a new $12 billion RCF in November 2022; the facility matures in November 2027. The RCF's principal financial covenants require net debt/consolidated EBITDA, as defined, to be no more than 3.75x.
Cash and cash equivalents totaled $3.7 billion at Dec. 31, 2022, including approximately $1.0 billion in cash held by foreign entities.
AT&T has arrangements with third-party financial institutions with respect to the sale of receivables under equipment installment plans as well as revolving service and trade receivables. Under the equipment instalment plans, receivables are sold for cash and a deferred purchase price. Fitch considers this a financing activity and makes certain adjustments, by adding the derecognized receivables back to the balance sheet as debt and then adjusting debt for financing activity at a 4:1 ratio.
Debt Maturities: On a consolidated basis, as of Dec. 31, 2022, AT&T and its subsidiaries had long-term debt maturities of approximately $5.9 billion in 2023 and $8.0 billion in 2024.
Issuer Profile
AT&T Inc. is one of the largest telecom operators in the world by revenues. The company generated approximately $120.7 billion in operating revenues in 2022 (operating revenues exclude revenues from discontinued operations, primarily WarnerMedia). The company is one of the three largest wireless operators in the U.S.
Summary of Financial Adjustments
Adjustments for outstanding equipment installment plan receivables related to financial services operations (assessed using a debt-to-equity ratio of 4x) resulted in a reduction of the level of debt used in calculating our leverage metrics by approximately $12 billion on a preliminary basis(at Dec. 31, 2022). Fitch added back off-balance sheet securitization debt ($8.5 billion) before determining the reduction.
Prior to the spin-off of WarnerMedia, Fitch added back to debt receivables sold related to Warner Media's programming and advertising receivables.
Fitch added certain preferred securities to debt: Tower Holdings LLC and Telco LLC and AT&T Mobility II LLC (the portion owned by unrelated third parties), increasing debt by approximately $8 billion and reducing non-controlling interests by a like amount.
Date of Relevant Committee
16 May 2022
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
AT&T INC. 
