OREANDA-NEWS. Fitch Ratings has affirmed the Issuer Default Ratings (IDR) and senior unsecured debt ratings for Telephone and Data Systems, Inc. (TDS) and its subsidiary United States Cellular Corp. (USM) at 'BB+'. In addition, Fitch has assigned an 'RR4' recovery rating to the senior unsecured debt for both companies. USM's ratings consider the consolidated ratings at TDS. The Rating Outlook remains Stable.

KEY RATING DRIVERS

Wireless Market Position: Fitch's current ratings reflect the challenges faced by TDS's main operating business -- USM -- which is the fifth-largest wireless operator in a market dominated by four national wireless operators. This concern is mitigated by TDS's financial flexibility arising from its healthy liquidity position and relatively low leverage for the rating. USM's subscriber trends in core markets improved in the second half of 2014; however, operating profitability in 2014 was suppressed due to billing system issues early in the year as well as higher losses on equipment driven by strong smartphone sales. Positive, though modest, net additions have continued in 2015 owing to much improved churn rates.

Leverage: TDS's gross leverage was 2.33x at March 31, 2015, including a portion of partnership distributions received from noncontrolled entities (2.6x without). Partnership distributions will be temporarily lower in 2015 and 2016, due to a one-time charge at the Los Angeles partnership related to a capital lease for AWS-3 spectrum covering the partnership's market.

Spectrum: USM participated in the Federal Communications Commission's (FCC) spectrum auction for AWS-3 spectrum through its limited partnership interest in Advantage Spectrum. Advantage Spectrum won 124 licenses with a total value of \\$338 million, net of the 25% designated entity discount. To fund the loans to Advantage Spectrum and its general partners and the capital contributions to Advantage Spectrum, USM issued \\$275 million of senior unsecured notes due 2063.

Solid Financial Profile: The ratings at TDS and USM reflect the current strong liquidity position owing to substantial cash balances, conservative balance sheet, long-dated maturities and unused revolving credit facility capacity of \\$399 million and \\$282 million at TDS and USM, respectively.

Cable Strategy: TDS has targeted the cable industry as an avenue of growth. The company acquired BendBroadband in September 2014 for \\$261 million in cash. BendBroadband was the second major cable acquisition for TDS, following the acquisition of Baja Broadband for \\$267 million in August 2013.

Noncore Assets: The sale of noncore assets has mitigated the effect of negative FCF on USM and TDS. USM has sold wireless towers located in the Chicago and St. Louis markets for approximately \\$159 million. Of this amount, the balance of approximately \\$142 million was received in January 2015, following an initial amount received in 2014. The customers in these markets had been sold to Sprint in 2013. In 2015, the company has received \\$145 million in cash from spectrum exchanges. While Fitch believes TDS considers USM's 5.5% stake in the Los Angeles partnership and its tower portfolio as core assets, Fitch also recognizes these assets provide the company with financial flexibility should the need arise as it pursues growth in the cable industry.

FCF Expectations Pressured: Fitch expects free cash flow (FCF) levels in 2015 to be negative due to the continued high level of capital investment and low margins in the wireless business. In 2015, Fitch expects negative FCF in the range of \\$300 million to \\$375 million, a material improvement relative to negative FCF of \\$463 million in 2014. Capital spending is estimated by TDS to approximate \\$830 million in 2015, up from approximately \\$800 million in 2014.

KEY ASSUMPTIONS

--Fitch assumes a low single digit decline in wireless service ARPUs during 2015 to 2017, which is offset by moderate gross subscriber additions and growth in equipment revenues under equipment instalment plans. Churn is expected to remain around 1.4% to 1.5%, in line with levels seen in 2015 and slightly below the 1.6% rate during 2H'14.

--Wireless EBITDA margins improve to the low double digits from the 8.7% level in 2014. Higher sales on equipment installment sales are helping margins, as the loss on equipment sales decreased by \\$152 million in 1H'15 alone.

--TDS Telecom demonstrates revenue growth due to cable acquisitions and growth in Hosted and Managed Services. Fitch expects 2015 EBITDA in the segment to decline in a 0% to 2% range, before returning to nominal growth in the years ahead.

--Fitch estimates leverage could increase to the 2.7x to 2.9x range in 2016 (2.5x to 2.7x including a portion of partnership distributions), as USM explores the opportunity to bid on additional spectrum assets. USM's plans are not known but for forecasting purposes, Fitch assumes USM spends a similar amount to what they spent on the AWS-3 auction.

RATING SENSITIVITIES

Positive Rating Action: Positive actions are not contemplated at this time.

Negative Rating Action: Longer term, Fitch believes TDS's and USM's ability to grow revenues and cash flows while competing effectively against much larger national operators is key to maintaining their 'BB+' Issuer Default Ratings (IDRs). In addition, if gross leverage ? calculated including partial credit for material wireless partnership distributions in EBITDA ? approaches 3.5x, a negative action could be contemplated.

LIQUIDITY

Strong Liquidity Profile: In relation to its total outstanding debt of \\$1,994 million at June 30, 2015, TDS has relatively high balances of cash, which amounted to \\$632 million. The ratings at TDS and USM reflect the current strong liquidity position owing to substantial cash balances, conservative balance sheet, available revolving credit facility capacity and generally long-dated maturities.

Debt Maturities: At TDS, a \\$400 million (\\$399 million of capacity) revolving credit facility matures in December 2017, as does a \\$300 million (\\$282 million of capacity) revolving credit facility at USM. The only material near-term maturity is the \\$225 million CoBank loan, which matures in 2022. The loan was drawn in July 2015. The earliest notes at TDS are due in 2045 (\\$116 million) and at USM the earliest note maturity is in 2033 (\\$544 million face value).