Why AT&T’s Investment Grade Rating Is Safe

The ratings agency revised its assessment of the company’s financial risk profile to “significant” from “intermediate” and the comparable rating analysis to positive from negative.

Also revised was the comparable rating analysis to positive from negative based on the view that leverage is strong for the “significant” financial risk assessment, and that AT&T’s business risk profile provides support for the rating and is bolstered by its position as the largest provider of video services in the U.S. following the acquisition of DirecTV.

Separately, the stable outlook reflects Standard and Poor’s expectation for low-single-digit percent revenue and EBITDA growth, and leverage in the low-3-times area over the next couple of years. Additionally, the credit ratings agency expects funds from operations to debt and discretionary cash flow to debt to be in the low-20% area and less than 5%, respectively.

Allyn Arden, credit analyst for Standard & Poor’s, said:

The revision of our financial risk assessment on AT&T reflects our expectation that adjusted debt to EBITDA will be in the low-3x area over the next couple of years and that funds from operations (FFO) to debt will be in the low-20% area.

He continued:

These credit measures are slightly worse than our previous base-case forecast of adjusted leverage of around 3x and FFO to debt in the low- to mid-20% area due to higher-than-expected levels of capital spending and EBITDA losses associated with international wireless operations.

While not likely, Standard and Poor’s could lower the rating if leverage were to rise or FFO to debt were to decline, with no expectation for improvement. Based on the company’s strong competitive position, the credit rating agency believes a potential downgrade would most likely result from a more aggressive financial policy that included material debt funding of stock repurchases or additional acquisitions.

Alternatively, the rating could be raised if AT&T were to achieve leverage of less than 2.75x or FFO to debt of around 30%, both on a sustained basis. Considering the company’s current leverage target, this could take several years to achieve.

Shares of AT&T closed Thursday down 1.2% in what was a the worst day for the broad markets all year. The stock has a consensus analyst price target of $37.05 and a 52-week trading range of $32.07 to $36.45.