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Fitch Ratings Affirms BellSouth’s Long-Term Debt Ratings At ‘AA-‘ & Assigns ‘F1+’ Short-Term Rating

Fitch Ratings Affirms BellSouth’s Long-Term Debt Ratings At ‘AA-‘ & Assigns ‘F1+’ Short-Term Rating

Business Editors


Fitch Ratings has affirmed BellSouth’s ‘AA-‘ long-term debt ratings and assigned an ‘F1+’ short-term rating to the company’s commercial paper program. The affirmation affects the approximately $14 billion in long-term debt issued by BellSouth Telecommunications, BellSouth Corp., and BellSouth Capital Funding. The Rating Outlook for BellSouth is Stable.

The rating affirmation reflects BellSouth’s continued strong financial performance, as well as the expectation that the company will continue to utilize its strong free cash flow primarily to pay down debt. The company has excellent credit protection measures, including an EBITDA to Interest coverage ratio in the 9.0 times (X) to 10.0X range and a relatively low debt-to-EBITDA ratio (both excluding the proportionate results of Cingular).

In light of the current economic conditions, the state of the telecommunications industry and the weak economic environment in Latin America, in early 2002 management revised expectations for 2002 proportional revenue growth (including Cingular) to 2%-4% from 7%-9%. Excluding Cingular, BellSouth’s operating performance has continued to moderate in early 2002 and should remain relatively flat through year-end. However, the company has implemented a number of cost cutting initiatives, including an additional headcount reduction of 5,000 employees, in order to maintain profitability and EBITDA growth. In addition, the 2002 capital expenditure forecast is now in a range of $4.2-4.4 billion, compared to actual expenditures of $6.0 billion in 2001. A similar posture reflecting tight control on costs has been taken in the Latin American operations.

Importantly, the effects of competition are expected to be moderated by continued growth of data services revenue and through the entry into the interLATA long distances services market. Data revenue growth should continue to remain relatively strong, as the company expects mid-teen percentage growth in 2002. Fitch believes this should be driven by the company’s success in DSL. BellSouth expects to have 1.1 million DSL subscribers by year-end 2002, up from 729,000 at the end of the first quarter of 2002. Wholesale data transport revenues have been relatively weak, with growth rates in the high single digit rates.

BellSouth recently received approval to offer interLATA long-distance (LD) services in Georgia and Louisiana, and Fitch expects the company to gain approval in its remaining 7 states by year-end 2002. As the majority of the approvals are expected to be obtained from the Federal Communications Commission toward the end of 2002, the material boost in revenue expected from long distance services is not expected to occur until 2003. Fitch believes the company’s product portfolio is significantly enhanced by the ability to offer LD, as BellSouth will be able to offer its retail and business customers a bundled offering.

Fitch expects BellSouth’s pre-dividend cash flow, including the proceeds from asset sales, to approximate $6 billion in 2002. Management has stated that the near-term priority for the deployment of excess cash is to strengthen the balance sheet through debt reductions. On a secondary basis, the company indicates it may return cash to shareholders through a potential moderate dividend increase and/or stock repurchases. The company’s dividend is currently less than $1.5 billion annually.

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