Fitch rates AT&T Comcast ‘BBB’

Fitch Ratings today reiterated its indicative BBB rating on the entity that will be formed when the AT&T Broadband/Comcast merger is completed.

BBB is the lowest of the investment grade ratings, and defines a company as having “good credit quality” with a low expectation of risk. But the rating definition warns that for BBB companies, “adverse changes in circumstances and in economic conditions are more likely to impair,” their ability to meet their credit obligations.

One aspect of the Fitch rating on AT&T Comcast considers the new company’s expected margin for earnings before interest, taxes, depreciation and amortization (EBITDA). According to Michael Weaver, managing director with Fitch, Comcast traditionally has EBITDA margins in the 40% range, while in the second quarter of 2002, AT&T Broadband posted an EBITDA margin of 25%. Proper integration of the two companies alone, he said, should lead to EBITDA margins of about 30% in 2003.

Another factor that should boost this margin will be how AT&T Comcast approaches its telephony offering. According to weaver, “it seems likely that AT&T Broadband was over-aggressive in telephony,” which affected EBITDA margins. Comcast, he said, has traditionally been more conservative in how it manages the service, an approach that should improve the new company’s numbers.

Also a factor in the BBB rating is the monetization of certain assets. When Fitch first released its BBB indicative rating in March of this year, it assumed AT&T Broadband would sell its stake in Time Warner Entertainment and use the proceeds to pay down debt. That sale has since been successfully completed.

Another asset that is likely to be sold, with the proceeds used for de-leveraging, would be the company’s 21% stake in Time Warner Cable. If AT&T Comcast realizes the full value of this investment, which would likely occur through an IPO, the company could clear $3 billion to $4 billion, said Weaver. Using this money to deleverage would provide a lift to the new company’s rating.

“I would say the monetization [of Time Warner Cable] will stabilize the BBB. It also has the potential to offer some positive momentum to that rating,” said Weaver in an interview today.

Other factors that could help lead to a ratings upgrade would be the generation of a material amount of free cash flow, further debt reduction, and margin improvement, said Weaver.