AT&T Cut to Two Notches Above 'Junk'

Reuters via NYTimes.com ^ | 5/29/02

[GeneD]

Filed at 3:09 p.m. ET

NEW YORK (Reuters) - AT&T Corp. (T.N) on Wednesday saw its credit ratings, affecting $25 billion of debt, cut to two notches above ``junk'' status by Moody's Investors Service, which said the company faces ``weakened revenue prospects'' and rising competition in its core business.

The cut triggers a rise in interest costs for the New York-based long-distance phone company, the nation's largest.

AT&T became the latest big telecom in May to suffer a credit rating downgrade. Its largest rival, WorldCom Inc. (WCOM.O), was cut to junk status by all leading U.S. rating agencies, while Qwest Communications International Inc. (Q.N), the No. 4 U.S local phone company, was cut to junk status by Standard & Poor's.

``The downgrade of a highly visible credit such as AT&T highlights some of the big problems in the telecommunications sector, such as overcapacity and the lack of pricing power,'' said John Boston, who oversees more than $1 billion as director of taxable fixed income for AmSouth Bank in Birmingham, Alabama. He sold his AT&T bonds last year.

Moody's cut AT&T's senior unsecured debt two notches to ''Baa2'' from ``A-3'' and affirmed its ``Prime-2'' short-term rating. Its rating outlook is negative. S&P rates AT&T's senior debt ''BBB-plus,'' one notch above Moody's new rating. AT&T enjoyed ''triple-A'' ratings in the early 1980s.

Moody's said the downgrade ``reflects the weakened revenue prospects for the long-distance voice and data industry,'' and rising competitive pressures from the regional Bell operating companies Qwest, BellSouth Corp. (BLS.N), SBC Communications Inc. (SBC.N) and Verizon Communications Inc. (VZ.N).

A spokeswoman for AT&T, Eileen Connolly, said ``the downgrade will have no practical effect on the way we conduct our business. We do expect to improve our margins in our growth businesses, specifically data and managed services.''

AT&T shares traded down 43 cents, or 3.5 percent, at $11.98 in Wednesday afternoon trading on the New York Stock Exchange. They have fallen about one-third this year, from $18.14.

HIGHER INTEREST COSTS

AT&T agreed to pay 0.25 percentage point more interest on $10.1 billion of bonds it sold in November for each one-notch cut in its credit ratings. The two-notch cut will cost AT&T an extra 0.5 percentage point in annual interest.

Prices on AT&T bonds with the ``step-up'' provision rose 1.5 to 1.75 cents on the dollar after the Moody's downgrade, while prices of other AT&T bonds fell 1.5 cents, traders said.

AT&T's 7.3 percent step-up notes maturing in 2011 rose 1.5 cents on the dollar to 92.25 cents, pushing the yield down to 8.51 percent from 8.76 percent. Its 6 percent notes maturing in 2009, which lack the sweetener, fell to 85.5 cents, pushing their yield up to 8.89 percent from 8.56 percent.

COMCAST MERGER

AT&T is spinning off its cable TV unit, AT&T Broadband, to Philadelphia-based Comcast Corp. (CMCSA.O).

Moody's said its downgrade assumes the Comcast spinoff will be completed. It said if the surviving voice, data and managed communications services company is unable to reverse ``negative revenue trends,'' operating performance could deteriorate, resulting in possible further rating cuts.

Still, it said AT&T has ``sufficient'' near-term liquidity. It also said that post-merger, AT&T will have substantially less debt and benefit from ``the value of the company's brand, customer base and extensive network, modestneeds and the benefits of past cost reduction efforts.''

``The rating agencies are not comfortable with the whole telecom industry, and future downgrades are still likely,'' said Joe Jackson, who helps invest $3 billion for BB&T Asset Management in Raleigh, North Carolina and would not say if he holds AT&T bonds. ``If you believe in an economic recovery, you would think, however, they are downgrading at the bottom.''

[razorback-bert]

AT&T has clue as to what it is doing, I get a mailing a week wanting me to be their customer, only problem is, I am already. Just a small sample of their problems with their customer base.