Fitch cuts AT&T to junk

Fitch Ratings said it downgraded the rating on AT&T Corp.'s senior unsecured debt to BB+ from BBB-. AT&T's commercial paper rating has been lowered to B from F3, and Fitch's outlook on AT&T remains negative.

Fitch said its rating action reflects the concerns regarding the potential for AT&T to stabilize the severe erosion of its revenue and operating cash flow. Fitch expects sustained secular deterioration of the long distance industry due to intense competition. The lack of growth opportunities facing AT&T is evident by the company's decision to exit the consumer market and by continued cuts in capital spending.

While the company has done a good job of maintaining a relatively strong balance sheet and free cash flow level, Fitch is concerned that continued core business erosion will lead to long-term strained financial flexibility.

In the short-term Fitch said it is concerned that the company will not be able to maintain commercial paper market access and that its bank facility renewal could prove difficult over the issue of collateralization. Longer-term, Fitch said, it is concerned that steady free cash flow erosion is unavoidable even with continued capital spending reductions.

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