Capital Markets

Fitch Cuts AT&T to Junk

After Ma Bell's withdrawal from the residential market, Standard & Poor's may follow suit.
Stephen TaubJuly 23, 2004

Oh, how the once-mighty can fall.

Fitch Ratings downgraded AT&T Corp.’s senior unsecured debt to junk status — to BB-plus, from BBB-minus. Fitch added that its rating outlook for the company remains negative.

The downgrade reflected AT&T ‘s roughly $11.9 billion of debt as of the end of the first quarter, as well as Fitch’s ongoing concerns “regarding the potential for AT&T to stabilize the severe erosion of its revenue and operating cash flow,” the ratings agency said in a statement.

Fitch added that it expects sustained deterioration of the long-distance industry due to intense competition, and the company seems to agree. On Thursday, “Ma Bell” announced that it would no longer compete for residential customers — a dramatic retreat for the company once named for Alexander Graham Bell &mdash and that it would instead focus on business services.

“Without pro-competitive, commercial arrangements [with AT&T’s corporate descendents, the “Baby Bells”], there are simply too many risk factors for AT&T to base our future with reluctant participants in a regulated environment that has been constantly in flux,” chairman and chief executive officer David Dorman told analysts, according to Reuters.

Standard & Poor’s, which in April placed AT&T on review for a ratings downgrade, announced Thursday that it, too, may cut the company’s ratings to junk, following AT&T’s announcement.

Fitch, for its part, did note that AT&T “has done a good job of maintaining a relatively strong balance sheet and free cash flow level.” However, the ratings agency also noted its concern “that continued core business erosion will lead to long-term strained financial flexibility.”

In the short term, Fitch stated, its concern is that “the company will not be able to maintain commercial paper market access and that its bank facility renewal could prove difficult over the issue of collateralization.” Over the longer term, it added the concern is that “steady free cash flow erosion is unavoidable even with continued capital spending reductions.”