Verizon Communications Inc. could become the next company to see its credit ratings cut after announcing a major merger.
On the heels of Verizon’s agreement to acquire MCI in a deal combining cash, stock, and assumed debt, the three major rating agencies have placed some of the telecommunications giant’s debt ratings on review for possible downgrade. At the same time, all three have placed MCI’s ratings on review for possible upgrade.
Specifically, Moody’s Investors Service placed Verizon’s long-term and short-term debt ratings and the long-term ratings of its telephone subsidiaries on review for possible downgrade, though it did affirm the A3 senior rating on Verizon Wireless while changing its outlook to stable from positive.
Moody’s stated that the review will focus on its assessment of the telecom company’s plans to generate multibillion-dollar expense reductions and increased revenue in light of MCI’s declining revenues and cash flows, and significant investment needs. The outlook change on Verizon “reflects our concerns the merger will be a distraction” during a time when the landscape of the telecommunications industry is rapidly changing, Moody’s added in a statement.
Moody’s said its review for possible upgrade of MCI will focus on Verizon’s plans for MCI’s debt upon completion of the merger. While a Verizon guarantee of that debt would equalize the two companies’ long-term ratings, “Moody’s believes unguaranteed MCI debt would still benefit from indirect” Verizon supportÂ .As a result, MCI’s rating could potentially rise a couple of notches, even absent a guarantee.”
Standard & Poor’s Ratings Services placed its long-term ratings of Verizon and affiliates on CreditWatch with negative implications. It added that in the event of a downgrade, Verizon’s long-term corporate credit rating, currently A-plus, would not fall lower than A. S&P also affirmed the A-1 short-term rating on financing arms Verizon Global Funding Corp. and Verizon Network Funding.
“The negative CreditWatch listing for the Verizon ratings reflects the potential for weaker financial parameters at the company, as well as a possible weakening of Verizon’s overall business risk position,” explained S&P managing director Richard Siderman, in a statement. “The initial financial impact on Verizon will not be significant, given MCI’s large cash position and the relative size of the companies. Accordingly, the CreditWatch placement incorporates concerns regarding prospects for material cash generation at MCI over the next few years.”
The positive CreditWatch listing for the MCI ratings reflects the company’s potential acquisition by a much more creditworthy entity, it added.
Standard & Poor’s recently affirmed its ratings on SBC Communications Inc. after it announced its planned merger with AT&T Corp. “To some extent, this was because SBC has some more capacity than Verizon to absorb such an acquisition given that it is rated a notch lower than Verizon,” S&P added in its report. “More importantly, the SBC affirmation recognized that AT&T, despite its significant business challenges, is still expected to generate good cash flow from its enterprise segment for a number of years.” In contrast, Moody’s placed SBC’s ratings on review for possible downgrade.
Fitch Ratings placed the A-plus rating on Verizon Global Funding’s outstanding long-term debt securities on Rating Watch Negative, and the B senior unsecured debt rating of MCI on Rating Watch Positive following the announcement of the merger.