Fitch sees AT&T Comcast as major player with credible deleveraging plan

By Ronda Fears

Nashville, Tenn., Sept. 26 - Fitch Ratings credit analysts said in a conference call Thursday that the merged AT&T Comcast Corp. will be a major player in the telecom and media sectors, with a credible deleveraging plan.

"Due to its enhanced size, significant subscriber clusters and leading position ... Comcast will be a significant player in the telecommunications and media industries," said Fitch analyst Brendan Buckley.

"Given [certain] assumptions, the company's execution so far and proposed guaranteed organizational structure, Fitch believes the company has a credible deleveraging plan."

Fitch Ratings on Thursday affirmed the BBB senior ratings for the new company, as well as the proposed restricted group - Comcast Cable Communications, AT&T Broadband (formerly known as TCI Communications) and MediaOne Group.

The outlook is expected to be stable post-merger, but the agency is keeping a negative watch pending the closing. Comcast officials on Monday said they expect closing in six to eight weeks.

The SEC has indicated it won't object to the way Comcast Corp. and AT&T Corp. plan to reset the date for valuing the stock related to the merger, Comcast said in an SEC filing Thursday. Using a measurement date of June 30, the merger would be valued at $54.9 billion whereas using Dec. 19, 2001, would put it at $71.3 billion, the filing said.

The merger includes an exchange offer of $11.8 billion of AT&T debt with some of that going to AT&T Broadband as a unit of AT&T Comcast.

The merger is contingent on regulatory approvals and the conversion of $5 billion of AT&T subsidiary convertibles into 115 million shares of AT&T Comcast.

A downgrade of TCI debt to a junk rating level would trigger put options associated with some $3.8 billion of TCI medium-term notes and term loans, potentially forcing refinancing, but Fitch believes this risk is remote.

Fitch anticipates TCI's $625 million of 5% convertible notes due 2006 and another 2026 issue, which together total roughly $1 billion will be put, however, due to allowances for that in the event of a one-notch downgrade or change of control.

Fitch also expects an additional $600 million of monetizations from shares of AT&T Corp and Sprint PCS, and $400 million from PCS collars with proceeds used for debt reduction.

With regard to the exchangeables and convertibles, the Fitch analysts said there is little risk that there would be a cash outlay except for the tax liabilities associated with the conversions.

"With many of the underlying securities being very depressed, we think there's very little incentive for the management team at Comcast to do anything other than exchange them," Fitch analyst Michael Weaver said.

AT&T has roughly $1 billion of convertibles linked to Cablevision Corp. and its Rainbow Media Group.

Comcast has about $1.66 billion of convertibles linked to PCS.

Fitch said an important consideration in its rating is the monetization of AT&T Comcast's 27% interest in Time Warner Entertainment and the retained 21% stake in Time Warner Cable.

Fitch expects that the upfront proceeds of $3.6 billion in cash and stock for TWE will be used to reduce debt, plus the funds from TWC which are also expected to be used for debt reduction.

Financial flexibility for AT&T Comcast is provided by a new credit agreement totaling $12.8 billion available on the date of the closing, which will be used to fund some $9 billion of AT&T inter-company debt, near-term debt maturities and other liabilities.

The facilities consist of a $7 billion bridge, maturing one year from closing, a $3.2 billion term loan maturing two years from closing and a $2.6 billion revolving credit facility maturing in five years.

Covenants consist of a maximum leverage ratio of 6.25x at the first quarterly reporting period reducing to 5.5x by the third and an interest coverage ratio of 2.0x at closing, increasing to 2.5x by the third quarterly reporting period.

The new credit facility will provide ample funding to complete the transaction, and Comcast Cable's current $4.2 billion credit facilities will remain outstanding, providing an additional source of future liquidity.

In addition, as expected, Comcast has completed some non-core asset sales.

From a credit-protection measure perspective, Fitch expects leverage at year-end 2003 to be below 4.0x and coverage in excess of 3x, improving thereafter.

Comcast will have over $4 billion availability under its bank facilities after the close of the transaction.

Along with the new facilities established for the transaction, Comcast has a $4.2 billion bank facility and commercial paper program, of which $700 million of bank debt and $400 million of commercial paper was outstanding at June 30.

Its back-up revolver has a two-year term out option and was undrawn at June 30.

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