Credit analyst sees no incentive to exchange AT&T debt

By Ronda Fears

Nashville, Tenn., August 13 - Carol Levenson, director of research at Gimme Credit, said there seems to be no incentive to exchange old AT&T debt for new AT&T debt or AT&T Comcast debt, plus she sees both options of new debt as lower credit quality.

Late Monday, AT&T (Baa2/BBB+) filed documents for a potential exchange offer for $12 billion of its existing debt.

"We don't pretend to have absorbed every word of this filing ... but it didn't take much scrutiny to discover that the price to be offered to bondholders to entice them to participate in this exchange is nowhere to be found," Levenson said.

"So, not knowing whether this will be an attractive or even a fair offer, we can only comment upon the credit quality alternatives, neither of which - AT&T or Comcast (Baa3/BBB) - makes one want to stand up and cheer, particularly after perusing the lengthy 'risks' section of the document."

AT&T and Comcast have been reluctant to say precisely how Comcast would assume the $20 billion or so in debt that will accompany its purchase of AT&T Broadband.

Now it appears they're going to try an exchange offer, which certainly would be easier to finance than a tender. The terms of the AT&T Comcast merger require an indenture amendment saying the successor company need not assume the obligations of AT&T under the indenture.

Participants in the exchange offer, some of whom will be exchanging their existing AT&T debt for new AT&T debt and the rest of whom will be receiving new AT&T Comcast debt, automatically consent to this amendment, but the amendment will be effective even for those who don't agree to it if holders of more than half of a given note series consent.

"Oddly, the offer does not include any consent fee. Just imagine if it were GE buying substantially all the assets of AT&T instead of Comcast, and then ask yourself whether you'd give up your rights to have GE assume your debt without being compensated," Levenson said.

"The weaker credit quality of Comcast, however, makes this a more difficult decision all round."

As for the exchange offers, she said, "Why would an AT&T bondholder exchange his or her bonds for new AT&T bonds and consent to the indenture amendment without some serious sweetening of terms?

"We think at a minimum bondholders should get a consent fee and some credit protection for participating in this amendment/exchange offer."

The offer to exchange AT&T bonds for AT&T Comcast bonds, with a so-called "cable guarantee" from each of the cable subsidiaries, is more difficult to evaluate, the analyst said, especially without knowing the financial terms.

"We believe a bondholder would be moving down somewhat in credit quality by participating," Levenson said.

"As we said last December, AT&T Comcast at best will be a marginally investment grade credit and that's incorporating some pretty rosy assumptions about debt reduction, synergies and flawless merger integration.

"The company also will be facing some scary short-term maturities and attendant refinancing risk, with a $7 billion one-year bridge loan carrying fairly strict financial covenants."

AT&T after the broadband spinoff will be a smaller, less diverse long distance company with dim prospects but with a strong balance sheet, a great brand name and the possibility of being bought by a higher quality credit, the analyst said.

"However, the market's current distaste for telecom paper means Comcast paper is trading somewhat better than AT&T paper, and perhaps the companies hope to exploit this," Levenson said.

"Unless the pricing and/or terms are phenomenally attractive, we don't see any reason to swap into a weaker credit."

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