Forum Archive Index - May 2002

[nickk@quicksilver.net.nz]

>From Bloomberg:


Look at the debt.  It just keeps coming!


AT&T's Rating Cut by Moody's, Interest Costs Rise (Update3)
By Emma Moody


New York, May 29 (Bloomberg) -- AT&T Corp.'s credit rating was cut to the
second-lowest investment grade by Moody's Investors Service, as the largest
U.S. long-distance phone company battles a decline in prices and demand for
its services. 

The two-level downgrade to ``Baa2'' from ``A3'' will increase AT&T's
interest costs on $10 billion of debt by as much as $50 million a year.
Shares of AT&T, whose rating is now two levels above junk status, fell to a
record low. 

``It's a very, very competitive business -- companies are practically
giving away long-distance,'' said John Cassady, who doesn't hold AT&T debt
in the $4 billion he helps manage at Fifth Third Investment Advisors. ``The
economy's going to have to come back for that to change.'' 

Sales of consumer long-distance telephone service at AT&T and rivals have
slumped industrywide amid competition for the lowest pricing, and the
rising use of e-mail and mobile phones. 

Long-distance call rates have dropped to as low as 2 cents a minute from as
high as 15 cents a few years ago. AT&T said last month consumer
long-distance sales this year will drop by about 25 percent after falling
20 percent in 2001. Sales plunged 22 percent to $3.13 billion in the first
quarter. 

Reversing Strategy 

Chief Executive Officer C. Michael Armstrong racked up $65 billion of debt
to build AT&T into the biggest U.S. cable television company and sell
cable-TV, phone and wireless services under one roof. Armstrong was forced
to reverse that strategy as its business continued to decline and its stock
price tumbled. 

In December, he agreed to sell AT&T's cable business to Comcast Corp. for
$72 billion. That sale, while reducing debt, will leave AT&T without one of
its best-performing businesses, Moody's analyst Robert Ray said. 

AT&T will have about $20 billion of debt outstanding after the cable sale
and much of AT&T's obligations don't come due until 2006, 2011 and 2031. 

``If the company is unable to reverse the negative revenue trends,
operating performance could continue to deteriorate,'' Moody's analyst
Robert Ray said in a report. That could lead to another downgrade, he said.

The ratings cut brings AT&T close to its rivals, which are also suffering
from declining demand. WorldCom Inc., a rival long- distance company had
its credit ratings sliced to junk as the company tries to obtain financing
to help pay debts coming due over the next 18 months. AT&T's cut brings its
rating in line with another rival, Sprint Corp. 

Higher Costs 

The reduction will also cost AT&T more. The telephone company in November
became the first U.S. issuer to agree to pay more interest on its bonds if
its credit ratings declined. A two-level downgrade by Moody's may cost the
phone company as much as 0.5 percentage points on the $10.1 billion of
bonds it sold at the time, analysts said. 

``It will raise interest costs,'' said Cory Jackson, an analyst who follows
AT&T debt at US Bancorp Piper Jaffray in Minneapolis. ``They definitely
face a challenging environment.'' 

The ratings downgrade ``will have no practical effect on the conduct of our
business,'' said spokeswoman Eileen Connolly, who said the downgrade
``wasn't totally unexpected.'' 

AT&T has sufficient access to liquidity for its near-term needs, including
availability under an $8 billion credit line, which expires in December,
Ray said. 

``We still think there's significant downside,'' for AT&T bonds, said Greg
Habeeb, who doesn't own AT&T among the $3 billion of bonds he helps manage
at the Calvert Group. ``We're very negative on the whole sector.'' 

Moody's downgrade affects about $25 billion of AT&T debt, Ray said.
Standard & Poor's rates AT&T ``BBB+,'' or one level higher than Moody's. 

 
 

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