Fitch Rates Verizon Communications' Exchange Offering 'A-'; Outlook Stable

Fitch Ratings has assigned an 'A-' rating to Verizon Communications Inc.'s (NYSE: VZ) senior unsecured exchange notes due 2036, 2048 and 2055. Verizon commenced an offer to exchange existing senior unsecured debt that it, or its GTE Corporation (GTE) subsidiary, had previously issued for the new Verizon notes. In the case of the GTE debentures, cash will comprise part of the total exchange price. The exchange will reduce significant maturity towers in 2023 and 2043 (the tower in each year exceeds $10 billion) as well as lower the average cost of debt. Fitch's current Issuer Default Rating for Verizon is 'A-' with a Stable Rating Outlook.

KEY RATING DRIVERS

--The February 2014 acquisition of the remaining Verizon Wireless (VZW) stake has pressured Verizon's recent credit metrics, pushing pro forma leverage at closing to approximately 2.6x. Gross leverage at Dec. 31, 2014 was 2.6x, with total debt at $113.3 billion. Net leverage was approximately 2.3x, and incorporates cash of $10.6 billion at year end.

--Fitch expects Verizon to materially reduce debt over the next few years, which, combined with EBITDA growth, supports the commitment of Verizon's management to delever. Management has met past debt reduction commitments, as evidenced by the aggressive delevering following the acquisition of Alltel Corporation in early 2009.

--Delevering is not expected to be affected by plans announced on Feb. 5, 2015 to sell assets in its wireless and wireline businesses, to pay for spectrum and repurchase common stock. Slightly more than 50% of the asset sale proceeds will be primarily used to retire debt.

--VZW's strong competitive position, evidenced by industry-low churn rates on average, high margins, and the most developed LTE network in the U.S., support Fitch's expectations that Verizon will maintain cash flow stability and support the longer rating horizon for leverage metrics to return to levels consistent with the rating.

In the wireless business, Verizon has a definitive agreement with American Tower Corp. (American Tower) whereby Verizon will lease, through a master prepaid lease, more than 11,300 towers. Verizon will also sell 165 towers outright to American Tower. The transaction represents nearly all of Verizon's owned tower portfolio. The transaction is expected to raise approximately $5 billion in cash and will close within 60 to 90 days. The second asset sale involves its wireline operations in California, Texas and Florida, which are being sold to Frontier Communications Corp. In total, the wireline operations produce less than 5% of consolidated revenues (and less than 4% of consolidated EBITDA). The wireline subsidiaries have a nominal amount of debt ($600 million) and this debt will travel with the subsidiaries being sold. The value of this transaction totals approximately $10.5 billion, and net after-tax proceeds of $6.8 billion are expected. The transaction is not expected to close until 2016 due to the lengthy regulatory approval process.

Verizon also announced the repurchase of $5 billion of common stock through an accelerated stock repurchase (ASR) program. Out of $11.8 billion in net cash proceeds from the two transactions, $6.8 billion will be allocated to debt reduction and $5 billion will go toward stock repurchases.

To pay for AWS-3 spectrum for which Verizon was the winning bidder in the Federal Communications Commission's (FCC) auction, Fitch expects Verizon to use cash on hand and proceeds from a term loan. Cash on hand amounted to $10.6 billion at year-end 2014. The remaining amount, net of a $900 million upfront payment in 2014, is $9.5 billion and due in two installments with the final payment on March 2.

Verizon's liquidity is supported by its reported consolidated cash balances, which were $10.6 billion at Dec. 31, 2014, and by its revolving credit facility (RCF). The $8 billion RCF matures in July 2018. Fitch expects Verizon to maintain aggregate commercial paper (CP) balances within a level fully backed by the RCF. The credit facility has no ratings triggers or other restrictive covenants, such as leverage or interest coverage tests.

On a consolidated basis, Verizon and its subsidiaries have maturities of approximately $2.6 billion in 2015.

KEY ASSUMPTIONS

--Fitch assumes Verizon revenues grow in the mid-single digit range over the near term, excluding the effect of the asset sales, and that margins are relatively stable in the mid-30% range.

--Debt reduction, combined with EBITDA growth, is expected to reduce leverage to a level appropriate for the rating in the 2016/2017 timeframe due to Verizon's strong position in the wireless industry and the significant cash flows generated by the wireless business.

--VZW will continue to generate strong free cash flow (FCF). VZW's simple FCF (EBITDA less capital spending) for 2014 was approximately $24.7 billion. Verizon's consolidated FCF (after dividends and capital spending) in 2014 of $6 billion was at the high end of Fitch's estimated range of $4 billion to $6 billion.

--In 2015, Fitch expects consolidated capital spending to be in line with company guidance of $17.5 billion to $18 billion, slightly higher than the $17.2 billion spent in 2014. Investment in the wireless network continues to be an area of emphasis due to the strong demand for 4G LTE capacity for rapidly growing data services.

--Potential spending in the FCC's 600 MHz TV broadcast auction, currently anticipated to occur in early 2016, is not included in Fitch's assumptions and will be an event-driven consideration.

RATING SENSITIVITIES

Fitch believes a positive rating action is unlikely in the foreseeable future, given the leverage incurred in the Vodafone transaction.

Conversely, 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 leverage to rise above 2.5x, such as another material acquisition or stock repurchases, could lead to a negative action in the absence of a strong commitment to delever.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Telecommunications - Ratings Navigator Companion' (Nov. 17, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Telecommunications: Ratings Navigator Companion

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809869

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979628

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