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Indiana Bell Telephone Company, Inc. — Moody’s affirms AT&T’s ratings following $27 billion C-Band spectrum investment and sale of a 30% stake in DirecTV; outlook is stable

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Rating Action: Moody’s affirms AT&T’s ratings following $27 billion C-Band spectrum investment and sale of a 30% stake in DirecTV; outlook is stableGlobal Credit Research – 12 Mar 2021New York, March 12, 2021 — Moody’s Investors Service (“Moody’s”) affirmed AT&T Inc.’s (AT&T) Baa2 senior unsecured debt ratings, Prime-2 (P-2) short-term commercial paper rating, and Ba1 ratings on the company’s preferred stock. The outlook is stable.The affirmation of AT&T’s ratings reflects Moody’s expectations that the company will be able to reduce its leverage (Moody’s Adjusted Debt to EBITDA) on a post-pandemic basis to 3.5x or less within about two years following the company’s debt-funded $27 billion C-Band spectrum investment (includes $4 billion of relocation costs) and sale of a 30% stake in DirecTV to TPG Capital (TPG). The company will be weakly positioned relative to its Baa2 long term senior unsecured debt ratings for the next two years, but we believe that the company remains committed to reduce its high debt levels using the company’s free cash flows and proceeds from asset sales. Affirmations: ..Issuer: AT&T Inc. ….Senior Unsecured Bank Credit Facility, Affirmed Baa2….Commercial Paper, Affirmed P-2….Pref. Stock, Affirmed Ba1….Pref. Stock Non-cumulative, Affirmed Ba1….Senior Unsecured Regular Bond/Debenture, Affirmed Baa2….Senior Unsecured Shelf, Affirmed (P)Baa2..Issuer: AT&T Corp…..Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2..Issuer: Indiana Bell Telephone Company, Inc…..Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2..Issuer: BellSouth Corporation….Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2..Issuer: Pacific Bell….Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2 Outlook Actions: ..Issuer: AT&T Inc. ….Outlook, Remains Stable ..Issuer: AT&T Corp. ….Outlook, Remains Stable ..Issuer: Indiana Bell Telephone Company, Inc…..Outlook, Remains Stable..Issuer: BellSouth Corporation ….Outlook, Remains Stable ..Issuer: Pacific Bell ….Outlook, Remains Stable RATINGS RATIONALE AT&T benefits from leading positions, important brands, scale, and revenue diversity that result in substantial qualitative credit strength. AT&T, a market leader in many of its businesses, has valuable assets, predictable revenue, and healthy margins. But these qualitative strengths are offset by outsized shareholder dividends, anemic top line growth and subscriber losses in several of its important segments. We believe the company is facing secular, competitive and transition pressures in its primary segments due to continued vulnerability from business disruption across its end markets. In addition, continued material subscriber losses could further limit financial flexibility and capacity relative to its credit ratings in the future unless mitigated with debt reduction.AT&T’s credit metrics and positioning for its Baa2 rating materially improved in 2019 following a year of focused debt reduction. However, AT&T’s leverage (Moody’s Adjusted) as of December 31, 2020 was 3.8x, up about 0.5x from FY 2019 due to the negative effects from the pandemic on many of the company’s businesses as well as the costs associated with the launch of HBOMAX. The company generated free cash flow and reduced debt slightly in 2020, which was a result of temporary working capital benefits from studio shutdowns and lower production and marketing costs from rescheduled film releases. We expect a reversal of the debt reduction trend and further improvement in credit metrics to be delayed following the company’s partially debt-funded spectrum investment, along with a potential for leverage to increase further as pre-pandemic fiscal quarters fall off through the end of the first quarter of 2021. The company has ceased share repurchases and suspended increases in its dividend. Management has also stated its new prioritization messaging as follows: 1) Invest in fiber/5G; 2) invest in streaming; 3) restore the balance sheet to historical strength levels; and 4) support the dividend. We believe that AT&T’s $27 billion wireless spectrum investment is consistent with the first priority so long as the company doesn’t delay other related 5G investments and retains the goal of constructing a true 5G wireless network with capabilities which should attract commercial IoT revenue opportunities over the medium to long-term. The company is also presently investing heavily in HBOMAX, following its second priority. We believe that the platform’s content lineup is very competitive, however, we also believe that the launch pricing and branding plan departed from proven strategies which has resulted in weaker subscriber uptake. Steps to bolster the platform such as promotional pricing and day and date film releases on the platform are temporary and could have negative repercussions when these strategies end. AT&T has outlined its strategy to return the strength of the company’s balance sheet towards pre-COVID pandemic levels, and Moody’s believe that the company will be able to execute on its plan to reduce its leverage back towards company’s target levels. But restoring the balance sheet strength to historic levels has yet to be defined publicly. The company’s large dividend limits financial flexibility, though we note that the long string of annual increases in the company’s dividend was recently broken when management announced that it will not grow the dividend payout in 2021.Prior to the commencement of the C-band wireless spectrum auction, Moody’s estimated AT&T would spend between $10 to $15 billion on C-Band spectrum. This expectation was based upon consensus estimates of around $40 billion for the total auction costs. We anticipated that the company could readily absorb a commitment of up to $15 billion with cash, asset sales proceeds and free cash flows. However, as bidding rose considerably above that level and ended at about $81 billion plus incentive and relocation costs of about $14 billion, we revised our estimate for AT&T to between $20 and $30 billion of total costs. On February 24, 2021, the FCC has announced today that AT&T’s bids totaled $23.4 billion plus relocation costs of about $4 billion. AT&T funded its initial deposit of $550 million already in 2020, but the remainder of the cost will mostly be funded with debt, along with cash on hand and eventual proceeds from asset sales. The company had about $9.7 billion of cash on hand at 12/31/20, and has yet to close on its previously announced sale of anime streaming service, Crunchyroll, to Sony Pictures Entertainment Inc., a wholly owned subsidiary of Sony Corporation (Baa1 stable), for $1.175 billion. We consider the company’s relocation costs obligation to be debt and it will be paid over the next three years and therefore can be met with free cash flow generation.On February 25, 2021, AT&T announced the sale of a 30% stake in its satellite and terrestrial video services provider business to TPG Capital (TPG). The deal includes AT&T’s DirecTV, U-verse, and all of AT&T’s virtual MVPD business, AT&T TV. The transaction values DirecTV at about $16 billion, which is down considerably from the $67 billion that AT&T paid (including debt assumption) to acquire DirecTV in 2015. TPG will pay $1.8 billion for its stake, which will include TPG receiving senior preferred equity yielding 10%. AT&T will have junior preferred equity in DirecTV that will PIK until TPG’s senior preferred equity is redeemed. The new company will incur about $6.0 billion of new debt plus assumption of $200 million of old DirecTV stub debt not exchanged after AT&T acquired DirecTV. Together with TPG’s $1.8 billion of equity, we expect that it will provide AT&T with about $7.6 billion of cash proceeds, which we expect will be used to help offset the company’s C-band auction cost obligation, and as a result, should quicken AT&T’s leverage reduction. The deal also includes AT&T funding up to $2.5 billion of net losses from the NFL Sunday Ticket contract for the 2021 and 2022 seasons, which we will include in our debt calculations until paid. The significant decline in DirecTV’s valuation is largely driven by the secular pressure hitting the linear pay-tv industry as consumers switch to over-the-top (OTT) MVPDs, subscription video on-demand (SVOD) and advertising video on-demand platforms, such as Netflix, Inc., Disney+, Amazon Prime, Paramount+, AT&T’s own HBOMAX and others. These secular headwinds as well as competition for resources within AT&T and failure to manage DirecTV competitively have caused the company’s DirecTV business to be one of the hardest hit in the industry, as the company has lost over 7 million video connections over the past two years. Moody’s believes that DirecTV has been a drag on the company’s overall equity valuation, and that it is logical that management would sell a part of this declining business and structure the sale such that it is deconsolidated from AT&T as voting control will be equally shared with TPG. However, we plan to proportionately consolidate DirecTV when calculating AT&T’s credit metrics given its significant 70% economic interest in the company as long as the credit impact is material. We will not include TPG’s or AT&T’s preferred or catch up equity in DirecTV as debt, as we consider them to be substantively a structured distribution schedule of free cash flows for the next several years, with excess cash flows used to redeem them and thereafter, we anticipate distributions consistent with the economic ownership. We anticipate that AT&T will not receive free cash flows beyond its distribution from DirecTV until about 2023 given TPG’s prioritization of distributions and the NFL Sunday Ticket indemnification payments from AT&T.AT&T’s exposure to governance considerations reflects the company’s financial policy, which has been very aggressive and has the potential to become even more aggressive given its levered capital structure, its common stock dividend, and recent shareholder activism. However, AT&T’s dividend as a percentage of pre-dividend free cash flow has meaningfully declined after corporate tax reform and the completion of the WarnerMedia acquisition, decreasing to 55% as of year-end 2020 from 70% as of year-end 2017, giving management more discretion regarding the direction of the company’s credit profile. If corporate taxes are raised under the new US administration, that would constrain the company’s financial flexibility. As of December 31, 2020, company-calculated net debt to EBITDA was 2.7x (estimated to be about 3.6x on a Moody’s adjusted net debt basis). AT&T’s leverage will continue to rise in 2021 following the company’s debt-funded capital investment in C-band spectrum, but we believe that the company will be able to reduce it leverage back to 3.5x or below by Q1 or Q2 2023. Consistent with the company’s recent guidance, Moody’s believes that paying down debt will be a main priority for AT&T. Before the impact of COVID-19, the company commented that it expected to return $75 billion to shareholders through $30 billion of share retirements and $45 billion in dividends from 2020 to 2022. Under new leadership, the company has de-prioritized share repurchases and prioritized investment, balance sheet strengthening and supporting its dividends. Due to the negative impact and ongoing uncertainty of the pandemic, the company has suspended all share repurchases, but has stated it remains committed to its dividend.AT&T’s short-term rating is Prime-2 (P-2). Moody’s expects that AT&T will maintain good liquidity over the next 12 to 18 months. As of December 31, 2020, AT&T held around $9.7 billion in cash, which was augmented by two undrawn $7.5 billion committed bank facilities totaling $15 billion and which mature in December 2023 and November 2025, respectively. The facilities provide same-day availability for US dollar advances and are subject to an ongoing maintenance test (net debt/EBITDA of 3.5x — excludes Moody’s adjustments). In January 2021, the company also entered into a $14.7 billion term loan credit agreement, which will be available for a single draw at any time before May 29, 2021, matures 364 days after drawing and for which the proceeds may be used for general corporate purposes, including financing the acquisition of additional spectrum in the C-band auction. Moody’s expects AT&T to remain comfortably in compliance with the leverage covenant. We expect annual free cash flow of at least $10 billion for the next 12 months. This free cash flow amount does not include additional liquidity available from the company’s accounts receivable (A/R) securitization program nor after-tax in process asset sale proceeds. Moody’s believes AT&T typically carries between $5 and $6 billion dollars of cash on its balance sheet for working capital purposes. As of December 31, 2020, AT&T has about $2.7 billion of long-term debt maturities coming due in 2021. We believe that AT&T’s free cash flow, proceeds from asset sales, along with proceeds from the company’s A/R securitization facility will be sufficient to meet upcoming cash needs for the next 12 months.Despite being weakly positioned for the Baa2 rating, the stable outlook reflects our expectation for recovery and improvement in operating performance over the next 18 months as the effects of the pandemic subside. It also assumes that the company will be able to execute on its plan to reduce leverage over the coming 12 to 24 months that will be elevated as a result of financing wireless spectrum in connection with the C-Band auction. In addition, Moody’s expects free cash flow will remain well in positive territory despite the potential for higher corporate taxes, the degree of structural subordination in the consolidated capital structure will be managed to historical levels, and liquidity will remain robust enough to comfortably address debt maturities and all other business needs.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody’s could upgrade AT&T’s Baa2 ratings if fundamentals improve, particularly with regard to subscriber numbers, investment in 5G wireless and new TV services is competitive, leverage (with Moody’s adjustments) falls and is sustained below 3x, and free cash flow to debt remains stable (except during important investment cycles).Moody’s could downgrade AT&T’s Baa2 ratings if (i) free cash flow to debt declines materially or becomes negative or if Moody’s adjusted leverage is above 3.5x, both on a sustained basis (excluding the effects of the pandemic so long as management demonstrates its commitment to its ratings), (ii) secular trends worsen, business fundamentals and/or profit margins weaken or (iii) liquidity is deemed inadequate and the company is viewed as facing moderate to high refinancing risk.The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.AT&T Inc. (AT&T), the largest telecommunications company in the US, has its headquarters in Dallas, Texas. In June 2018 AT&T completed its merger with Warner Media, LLC, adding the global media and entertainment platforms of Warner Bros., HBO and Turner to its sizable mobile, video, and broadband customer relationships. AT&T generated about $172 billion of revenue in FY 2020.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. 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Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Neil Begley Senior Vice President Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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