Jan 13, 2006 12:34 PM,

S&P comes clean on wireline risks

By Vince Vittore

Standard & Poor's Ratings Services today said that the quick success of cable operators such as Cablevision in the residential voice market is causing it to reassess the business risk for the largest incumbent local exchange providers.

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Traditionally rated among the most credit sound, carriers such as Verizon, SBC, BellSouth and CenturyTel have seen their ratings on their debt lowered over the last year. Recently, the long-term ratings on Verizon Communications and related entities, including Verizon Wireless, were lowered by one notch. Ratings for AT&T ('A' long-term corporate credit rating, 'A-1' short-term rating), BellSouth (A/A-1), and CenturyTel (BBB+/A-2) were placed on CreditWatch with negative implications, as were the ratings for Cingular Wireless ('A').

While S&P believes there could be revenue substitution from higher DSL penetration, it’s the increasing penetration rate of cable operators that has it concerned. In a call with equities analysts today, the company noted that Cablevision has already captured 20% voice penetration among its existing video subscribers and 13% of this households passed. Most of that has come in the New York metro area at the expense of Verizon.

“We determined that the local exchange business for Verizon is no higher than the BBB category,” said Eric Geil of S&Ps Corporate Telecommunications & Cable Ratings Team. “We do recognize that Verizon has a significant position in wireless and this could offset any loss in the wireline business.”

However, competition has changed the entire financial dynamic for carriers, he said. In fact, it would appear as if the entire wireline industry may have to get used to lower ratings. The company put as yet unnamed Sprint’s local wireline unit on credit watch late last year and said today that its ratings would be subject to the same scrutiny as RBOCs.

“If you look at Sprint as having some major market presence that is subject to competition from upgraded cable operators, that’s the kind of thing that we’re looking at,” Geil said.