OREANDA-NEWS. Fitch Ratings has downgraded to 'A-' from 'A' the Issuer Default Ratings (IDRs) and debt security ratings for AT&T Inc. (AT&T) (NYSE: T) and its subsidiaries. The company's Short-term IDR and commercial paper ratings have been downgraded to 'F2' from 'F1'. The Rating Outlook is Stable, and the Negative Rating Watch has been removed. A full rating list of ratings follows at the end of this release.

Fitch has accelerated resolving the existing Rating Watch as the completion of the recent spectrum auction provides certainty as to a near term increase in leverage for AT&T. Whether or not the DIRECTV transaction closes, the 'A-' level would remain the appropriate rating level even without the acquisition of DIRECTV being completed.

The Rating Outlook is Stable, given AT&T's intent to delever to a net leverage target of 1.8x over a three year period following the completion of all pending transactions, including spectrum. Fitch believes that the company is likely to reach gross leverage of approximately 2.0x, which in Fitch's view is appropriate for the 'A-' rating level, by the end of 2017.

The company's IDR and debt securities were placed on Rating Watch Negative on May 19, 2014, when AT&T announced the acquisition of DIRECTV. The transaction is pending regulatory approval and Fitch believes it has a high likelihood of going through as it has been relatively uncontroversial. DIRECTV's wholly-owned indirect subsidiary, DIRECTV Holdings LLC, has an IDR of 'BBB-'.

Should AT&T and DIRECTV terminate their agreement due to the lack of regulatory approval, Fitch believes that the company's metrics would return to a level appropriate for an
'A-' rating within a three year period. Without DIRECTV, AT&T delevers at a slower pace, but Fitch believes the company can still get gross leverage to 2.0x within three years as leverage following the spectrum investment peaks at a lower level.

KEY RATING DRIVERS

On Jan. 30, 2015, the Federal Communications Commission (FCC) announced the winning bids in the AWS-3 spectrum action. In the auction, AT&T bid approximately \$18.2 billion to acquire contiguous 10x10 MHz blocks of AWS-3 spectrum covering approximately 96% of the U.S. population. AT&T's total net remaining payment is \$17.3 billion -- net of a \$0.9 billion upfront down payment made prior to the start of the auction in November 2014 with \$2.7 billion due February 13 and the final balance due March 2.

Fitch believes AT&T's acquisition of DIRECTV will improve its financial flexibility owing to DIRECTV's strong free cash flows (FCF) of approximately \$3 billion annually and the significant equity component in the transaction financing. The acquisition is expected to be completed in the first half of 2015, following the necessary regulatory approvals.

For 2014, AT&T's net leverage as calculated by Fitch approximated 1.8x, an increase from the 1.7x at year-end 2013. EBITDA has been under some pressure due to wireless subscribers converting to no-device subsidy plans, which provide for discounted service on the company's data sharing plans. Other factors contributing to EBITDA pressure include rising content costs for its U-verse video services, and expenses related to the March 2014 Leap Wireless acquisition and the pending DIRECTV transaction.

Fitch anticipates that AT&T will use \$11.155 billion in term loan facilities entered into in January 2015 and a portion of its cash balances to fund the spectrum purchases. At Dec. 31, 2014, cash and cash equivalents, pro forma for a recent \$2.6 billion debt offering and the \$2.5 billion acquisition of Iusacell, amounted to approximately \$8.7 billion and highly liquid certificates of deposit and time deposits amounted to approximately \$1.9 billion.

At Dec. 31, 2014, the company did not have any drawings on either its \$5 billion RCF due 2018 or its \$3 billion RCF due 2017. The principal financial covenant for all facilities other than a new \$2 billion 18-month term loan facility requires debt-to-EBITDA, as defined, to be no more than 3x.

For 2014, FCF (net cash provided by operating activities less capital expenditures and dividends) was modestly positive at \$353 million, and capital spending was \$21.4 billion.

Recently, AT&T completed wireless and wireline initiatives focused on its 4G LTE and IP broadband networks, respectively, leading to a moderation of spending going forward. Following the completion of these initiatives, AT&T has indicated 2015 capital spending will approximate \$18 billion.

At Dec. 31, 2014, total debt outstanding was approximately \$82.1 billion. Relative to the company's cash, RCF availability, and modest expected FCF, Fitch believes upcoming debt maturities are manageable. Debt maturities are approximately \$6.5 billion in 2015 and include approximately \$1.7 billion of debt putable to the company on an annual basis that Fitch believes is unlikely to be put.

RATING SENSITIVITIES

Negative: 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 the company to fall off its delevering path, such as another material acquisition or stock repurchases, could lead to a negative action in the absence of a strong commitment to delever.

Positive: Fitch believes a positive rating action is unlikely in the foreseeable future, given the leverage incurred primarily through the pending DIRECTV acquisition and spending on spectrum.

Fitch has downgraded the following ratings with a Stable Outlook:

AT&T, Inc.
--Long-term IDR to 'A-' from 'A';
--Senior unsecured debt to 'A-' from 'A';
--\$5 billion revolving credit facility due December 2018 to 'A-' from 'A';
--\$3 billion revolving credit facility due December 2017 to 'A-' from 'A';
--\$6.286 billion Tranche A three-year term loan facility to 'A-' from 'A';
--\$2.869 billion Tranche B five-year term loan facility to 'A-' from 'A';
--\$2 billion 18-month term loan facility to 'A-' from 'A';
--Short-term IDR to 'F2' from 'F1';
--Commercial paper to 'F2' from 'F1'.

AT&T Corp.
--Long-term IDR to 'A-' from 'A';
--Senior unsecured to 'A-' from 'A'.

BellSouth Corp.
--Long-term IDR to 'A-' from 'A';
--Senior unsecured to 'A-' from 'A'.

BellSouth Capital Funding Corp.
--Senior unsecured to 'A-' from 'A'.

BellSouth Telecommunications, Inc.
--IDR to 'A-' from 'A';
--Senior unsecured to 'A-' from 'A'.

AT&T Mobility LLC (formerly Cingular Wireless, LLC)
--Long-term IDR to 'A-' from 'A';
--Senior unsecured to 'A-' from 'A'.

New Cingular Wireless Services, LLC (formerly AT&T Wireless Services, Inc.)
--Long-term IDR to 'A-' from 'A';
--Senior unsecured to 'A-' from 'A'.

Ameritech Capital Funding Corp.
--Long-term IDR to 'A-' from 'A';
--Senior unsecured to 'A-' from 'A'.

Indiana Bell Telephone Company
--Long-term IDR to 'A-' from 'A';
--Senior unsecured to 'A-' from 'A'.

Michigan Bell Telephone Company
--Long-term IDR to 'A-' from 'A';
--Senior unsecured to 'A-' from 'A'.

Pacific Bell Telephone Company
--Long-term IDR to 'A-' from 'A';
--Senior unsecured to 'A-' from 'A'.

Wisconsin Bell Telephone Company
--Long-term IDR to 'A-' from 'A';
--Senior unsecured to 'A-' from 'A'.

Southwestern Bell Telephone Company
--Long-term IDR to 'A-' from 'A';
--Senior unsecured to 'A-' from 'A'.