OREANDA-NEWS. On Jan. 30, 2015, the Federal Communications Commission (FCC) announced the winning bidders in the AWS-3 spectrum action. Verizon Communications Inc.'s (Verizon; NYSE: VZ) total winning bids amounted to approximately \$10.4 billion. This amount was well under the level which would have triggered a negative rating action (\$15 billion) by Fitch. In Fitch's view, Verizon's ratings (Issuer Default Rating [IDR] and senior unsecured debt of 'A-') and Stable Outlook are unaffected by this action.

Although Verizon has not disclosed detailed funding plans to pay for the spectrum, Fitch does not expect Verizon to have significant debt funding needs, as its consolidated cash balances were \$10.6 billion at Dec. 31, 2014. In addition to cash, the company has an \$8 billion revolving credit facility (RCF). Verizon's total net remaining payment is \$9.5 billion, net of a \$0.9 billion upfront downpayment made prior to the start of the auction in November 2014, with approximately \$1.2 billion due February 13 and the final balance due March 2.

Verizon will acquire 181 licenses, covering a population of 192 million, or 61% of the U.S. The spectrum enhances Verizon's relatively deep existing AWS spectrum portfolio, which was built in the 2006 AWS spectrum auction and through acquisitions, including 2012 acquisitions of spectrum from cable companies.

KEY RATING DRIVERS

--The February 2014 acquisition of the remaining Verizon Wireless (VZW) stake has pressured Verizon's recent credit metrics, pushing pro forma leverage at closing to approximately 2.6x. Gross leverage at Dec. 31, 2014 was 2.6x, with total debt at \$113.3 billion. Net leverage was approximately 2.3x, and incorporates cash built in anticipation of potential spectrum funding; cash stood at \$10.6 billion at year-end.

--Going forward, Fitch expects Verizon to materially reduce debt over the next few years. Debt reduction, combined with EBITDA growth, is expected to reduce leverage to a level appropriate for the rating in the 2016/2017 timeframe as a result of Verizon's strong position in the wireless industry and the significant cash flows generated by the wireless business. This is in combination with Verizon management's commitment to delever, which has been demonstrated in the past as evidenced by the aggressive delevering following the acquisition of Alltel Corporation in early 2009.

--A key to debt reduction over the next several years will be the continued generation of strong free cash flow (FCF) at VZW. VZW's simple FCF (EBITDA less capital spending) for 2014 was approximately \$24.7 billion. Owing to the acquisition of the remaining VZW stake, Verizon's FCF (after dividends and capital spending) was affected by transaction-related interest costs, higher dividend requirements due to the shares issued to Vodafone equity holders, and higher cash taxes. Despite these factors, 2014 FCF of \$6 billion was at the high end of Fitch's estimated range of \$4 billion to \$6 billion.

--VZW's strong competitive position, evidenced by industry-low churn rates on average, high margins, and the most developed LTE network in the U.S., support Fitch's expectations that Verizon will maintain cash flow stability and support the longer rating horizon for leverage metrics to return to levels consistent with the rating.

Verizon's liquidity is supported by its reported consolidated cash balances, which were \$10.6 billion at Dec. 31, 2014, and by its RCF. The \$8 billion RCF matures in July 2018. Fitch expects Verizon to maintain aggregate commercial paper (CP) balances within a level fully backed by the RCF. The credit facility has no rating triggers or other restrictive covenants, such as leverage or interest coverage tests.

On a consolidated basis, Verizon and its subsidiaries have maturities of approximately \$2.6 billion in 2015.

In 2015, Fitch expects consolidated capital spending to be approximately \$17.8 billion, slightly higher than the \$17.2 billion spent in 2014. Investment in the wireless network continues to be an area of emphasis due to the strong demand for 4G LTE capacity for rapidly growing data services.

RATING SENSITIVITIES

Fitch believes a positive rating action is unlikely in the foreseeable future, given the leverage incurred in the Vodafone transaction.

Conversely, Fitch may take negative rating action if operating performance causes delevering to take place at a materially slower than anticipated pace, either alone or in combination with material debt-financed acquisitions. Discretionary management moves that cause leverage to rise above 2.5x, such as another material acquisition or stock repurchases, could lead to a negative action in the absence of a strong commitment to delever.