Moody's cuts AT&T debt rating to junk

Investor service notes `relentless' competition in telecommunications

July 30, 2004|By BLOOMBERG NEWS

NEW YORK - AT&T Corp.'s debt was cut to junk yesterday by Moody's Investors Service, capping a two-decade slide for a company that once had a monopoly on U.S telephone service and the highest credit rating.

Moody's cited "relentless" competition that will cause a longer, larger decline in revenue and profit than previously thought. Moody's sliced its ranking on AT&T's long-term debt two levels to Ba1 from Baa2 and said the outlook is negative.

The reduction affects $10.2 billion in debt.

AT&T's ability to repay borrowings has deteriorated as it lost its dominant position in the U.S. telephone market. AT&T, the largest U.S. long-distance phone company, lost customers to its former local-phone units and alternate technologies such as e-mail and mobile phones. The heightened competition caused AT&T to say last week that it will leave the residential phone business.

"This is a company that obviously has problems and will continue to be under pressure," said Jim Hannan, who oversees $2 billion of bonds as portfolio manager at MTB Investment Advisors in Baltimore. Hannan said he doesn't hold AT&T bonds and hasn't for more than a year.

A junk rating will cost AT&T an extra $32.5 million in annual interest, said Andrew Backover, a spokesman for the Bedminster, N.J.-based company.

"Though we understand their concerns about the state of the overall telecom industry, we disagree with Moody's on the necessity of this action," Thomas Horton, the company's chief financial officer, said in an e-mail message.

The cut reflects "our concerns that relentless competition will cause a larger and more protracted decline in the company's revenues and earnings than we had originally expected," Moody's analyst Dennis Saputo said in the report.

Saputo cut AT&T's short-term rating to Not Prime from P-2.

Last week, AT&T reported an 80 percent drop in profit and its 18th straight quarterly sales decline.

About $6 billion of AT&T's bonds have so-called step-up provisions, which add 0.25 percentage point of interest for every credit rating drop at Moody's and Standard & Poor's. AT&T had $1.16 billion in interest expense last year.

AT&T shares rose 1 cent to $15.01 in New York Stock Exchange composite trading. The extra yield demanded to own AT&T's bond maturing in 2031 widened by 30 basis points to 390 basis points more than U.S. Treasuries with comparable maturities, traders said. The coupon was reset higher at 8.75 percent after it was originally sold with an 8 percent coupon.

AT&T will rely on selling to businesses, an area troubled by "brutal" competition, Saputo said in his report.

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