AT&T Bond Offer Hints at Broadband Plans

11/11/2001 7:00 PM Eastern

AT&T Corp. was expected to launch a $5 billion bond offering last week, a move some observers called an indication that the company may keep its AT&T Broadband cable unit independent.

The telco has been under pressure to refinance about $6.5 billion in commercial paper— essentially an unsecured obligation that a company issues to finance its short-term credit needs. Commercial paper terms usually range from two to 270 days.

AT&T's commercial paper obligation is due in about 90 days, and the pending bond issue would allow the company to refinance that debt under more favorable terms.

AT&T was expected to issue the bonds in three tranches of 5-year, 10-year and 30-year notes, respectively.

By continuing to shore up its balance sheet, AT&T could make a stronger case to investors and its board of directors to keep the Broadband unit independent, according to some observers.

AT&T has been considering its options ever since Comcast Corp. made an unsolicited bid for the Broadband unit in July. Those options include keeping the unit independent or seeking a buyer.

AT&T rejected the Comcast bid in August, but continues to negotiate with the company. AT&T has also reportedly talked with Cox Communications Inc., AOL Time Warner Inc. and Microsoft Corp. about making an investment in the division.

The company has set a late-November deadline for bids for the cable unit, according to people familiar with the situation.

AT&T chairman C. Michael Armstrong has said the company would make a decision on the fate of AT&T Broadband by the end of the year.

Last month, AT&T also made a move that some analysts saw as an effort to keep the division independent — or at least until it could attract a higher price — by hiring three cable veterans to head up the management team.

In October, AT&T Broadband named former Continental Cablevision Inc. president William Schleyer as president and CEO of the cable unit. Also hired were former Continental executives Ron Cooper as chief operating officer and David Fellows as chief technology officer.

Schleyer, Cooper and Fellows — each of whom has an excellent reputation as an operator — were brought in to help boost AT&T Broadband's cash-flow margins, which have been among the industry's lowest.

But while margins at AT&T's cable unit continue to climb — they were up six points, to 25.2 percent in the third quarter — AT&T continues to try to pay down its massive corporate debt that once stood as high as $65 billion.

AT&T has managed to shave $18 billion off that debt through the sale of non-core assets; it now stands at $38.5 billion. But future refinancings became a little harder earlier this month, after two credit rating agencies downgraded their ratings on AT&T debt.

Late last month, Moody's Investors Service dropped AT&T's long-term and short-term credit ratings, pushing the company into a lower-tier market from which it is more difficult and expensive to access commercial paper. And on Oct. 29, Standard & Poor's placed AT&T's long-term debt on CreditWatch with negative implications.

In a conference call on Oct. 30, S&P credit analyst Richard Siderman said that if AT&T decides to keep AT&T Broadband independent, it could possibly achieve an A-minus rating, making it the best rated cable company in the industry. The best rated company in the sector today — AT&T Broadband suitor Comcast Corp. — has a BBB-plus debt rating from S&P.

But an acquisition would force the credit agencies to lower their ratings of Broadband debt, with Siderman stating that the best rating AT&T Broadband could achieve in an acquisition is BBB-plus.

Siderman said on the conference call that maintaining that A-minus debt rating would be contingent on several factors, including AT&T Broadband's substantially paying down its debt.

The company's debt-to-cash flow ratio also would be a mitigating factor in determining which rating it receives, Siderman added.

Siderman said that in the next two or three years, AT&T Broadband should have a debt-to-cash flow ratio of 4 times. He added that maintaining that investment grade rating also would depend on AT&T Broadband raising its cash flow margins from the current level of 25 percent to the low 30 percent range in the next two years.

"If [Broadband] had a debt-to-cash flow ratio in the mid-fours, that would be consistent with an investment grade rating," Siderman said. "We have an A-minus rating on AT&T with negative implications. The way we see it, that would be the highest [rating] cable could get. It doesn't mean it's likely, it means it's possible."

But Siderman said that a combined Comcast/AT&T Broadband acquisition, the combined entity would likely be rated as Comcast is rated now.

"To get to A-minus, leverage would have to be materially better than where Comcast is now," Siderman said.

Not that a BBB-plus rating would hinder a combined company from accessing the capital markets. BBB-plus, although at the low end of an investment-grade rating, is still better than the junk bond ratings that many cable companies have because of their high debt.

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