2021/3/15 Fitch Downgrades AT&T's Long-Term IDR to 'BBB+'; Outlook Stable

RATING ACTION COMMENTARY Fitch Downgrades AT&T's Long-Term IDR to 'BBB+'; Outlook Stable

Fri 12 Mar, 2021 - 下午4:29 ET

Fitch Ratings - Chicago - 12 Mar 2021: Fitch Ratings has downgraded AT&T Inc.'s Long- Term Issuer Default Rating (IDR) and the Long-Term IDRs of its subsidiaries to 'BBB+' from 'A-'. In addition, Fitch has downgraded AT&T Inc.'s Short-Term IDR and Commercial Paper (CP) rating to 'F2' from 'F1'. The Rating Outlook is Stable.

Fitch has also assigned a 'BBB+' rating to AT&T's $14.7 billion senior unsecured delayed draw term loan. The facility is available in a single draw, and will mature 364 days after the borrowing date. Proceeds are expected to be used for general corporate purposes including the acquisition of spectrum. Fitch expects any borrowings on the facility to be repaid via subsequent capital markets transactions, proceeds from asset sales and funds from operations.

The downgrade reects the expectations that leverage will be sustained above Fitch's dback e e

previous negative rating sensitivity threshold of gross core telecom debt/operating F EBITDA of 2.5x for a protracted period. AT&T's credit prole is being affected by spending in the C-Band auction, near-term pressures experienced due to the coronavirus pandemic and secular pressures in the video business.

The Stable Outlook incorporates management's commitment to reduce debt in the near term using free cash ow after dividends and proceeds from asset sales until it reaches its target leverage. AT&T is targeting a net debt-to-adjusted EBITDA ratio of 2.5x or lower during 2024, and does not plan to repurchase shares during this period. Fitch

https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-at-t-long-term-idr-to-bbb-outlook-stable-12-03-2021 1/13 2021/3/15 Fitch Downgrades AT&T's Long-Term IDR to 'BBB+'; Outlook Stable estimates AT&T's net leverage metric at the end of 2020 was approximately 0.4x under Fitch-calculated net core telecom leverage; see "Summary of Financial Adjustments" below.

In addition, the Long-Term IDR and senior unsecured debt of DIRECTV Holdings LLC has been downgraded to 'BBB+' from 'A-', and the ratings have been placed on Rating Watch Negative. The Rating Watch Negative reects the assumption of debt by New DIRECTV once the transaction with TPG Capital is completed. The new stand-alone entity is expected to have an issuer default rating lower than AT&T.

RATING ACTIONS

ENTITY/DEBT RATING PRIOR

Wisconsin Bell LT BBB+ Rating Outlook Stable Downgrad A- Rating Telephone Company IDR e Outlook Stable

• senior unsecured LT BBB+ Downgrad A- e

Michigan Bell LT BBB+ Rating Outlook Stable Downgrad A- Rating Telephone Co. IDR e Outlook Stable

• senior unsecured LT BBB+ Downgrad A- e

Pacic Bell LT BBB+ Rating Outlook Stable Downgrad A- Rating Telephone Company IDR e Outlook Stable

VIEW ADDITIONAL RATING DETAILS dback e e F KEY RATING DRIVERS

Large Scale and Diversification: AT&T is the largest telecommunications operator in the U.S. Its Long-Term IDR is underpinned by a diversified revenue mix, significant size and economies of scale. AT&T is among the largest providers of media and telecommunications services in several verticals, including wireless, video distribution, residential broadband/voice, business wireline and media/entertainment. These factors are balanced against an intensely competitive wireless environment and the effect of recent secular trends on the video distribution business. https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-at-t-long-term-idr-to-bbb-outlook-stable-12-03-2021 2/13 2021/3/15 Fitch Downgrades AT&T's Long-Term IDR to 'BBB+'; Outlook Stable C-Band Spectrum Auction: AT&T won licenses with a total value of $23.4 billion, out of just over $81 billion spent by all wireless operators in the entire auction. AT&T will acquire spectrum totaling about 80 MHz nationwide, including 40 MHz in the rst phase. The rst 40 MHz of spectrum is expected to become available after December 2021 after an accelerated clearing process, with the remainder available after December 2023.

A number of factors affected the total bidding in the auction, including the large amount of spectrum available and the characteristics of the spectrum which provide for a good mix of coverage and capacity. Valuations were reasonable compared to prior auctions, based on the price on a per MHz-pop (/MHz-pop) basis, a common measure to value spectrum. The C-Band auction came in at approximately $0.94-0.95/MHz-pop across all blocks, excluding clearing and relocation costs. In the AWS-3 auction, the more desirable 50MHz of paired spectrum went for approximately $2.71/MHz-pop, or nearly 3x as much, while in the Broadcast Incentive Auction, spectrum was valued at $0.93/MHz-pop.

AT&T's guidance calls for gross capital investment of $21 billion in 2021, with expected amounts for C-Band spectrum deployment already included in guidance. Spending on C- Band spectrum deployment is expected to be in the $6 billion to $8 billion range, with the majority in 2022-2024 period.

Coronavirus Pandemic's Impact: AT&T's telecom operations have been relatively stable during the course of the coronavirus pandemic, due to the essential nature of its wireless, broadband and business services. Wireless revenues grew in 2020, partly offsetting modest declines in broadband and business wireline services. Within broadband, high-speed data services grew, mitigating declines in legacy and other services and equipment revenue; similarly, strategic business wireline services grew modestly, mitigating declines in legacy and other services and equipment revenue.

The pandemic has a more pronounced effect on AT&T's media assets causing signicant

pressures on Warner Bros.' theatrical and television product revenue due to the dback e postponement of theatrical releases and television production delays. At Turner, e F revenues decreased due to lower advertising revenues resulting from cancellation and shifting of live sporting events as well as compressed seasons.

Near-Term Leverage Elevated: AT&T made progress in lowering gross core telecom leverage following the acquisition of Time Warner in 2018, reducing gross core telecom leverage at YE 2019 to 2.8x. However, the impact of the coronavirus pandemic on operating results pushed gross core telecom leverage back up to 3.0x at YE 2020. Fitch expects core telecom leverage to be at 3.5x at YE 2021, with the leverage metric affected by borrowing related to spending in the C-band auction and the modestly https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-at-t-long-term-idr-to-bbb-outlook-stable-12-03-2021 3/13 2021/3/15 Fitch Downgrades AT&T's Long-Term IDR to 'BBB+'; Outlook Stable levering effect of the New DIRECTV transaction. Further debt reductions and a modest rebound in core EBITDA during 2021-2023 could lead to an improvement in AT&T's credit profile, with gross core telecom leverage reaching approximately 3.0x by the end of 2023.

To determine core telecom leverage, Fitch applied a 4-1 debt/equity ratio to the company's handset receivables, after adding back off-balance-sheet securitizations related to the handset receivables and Warner Media receivables. Fitch has also treated subsidiary preferred stock as debt (by removing the preferred stock from noncontrolling interests) given relatively limited coupon deferral periods relative to traditional hybrids and the potential for redemption in certain circumstances.

Competitive Environment: The wireless market continues to be very competitive. T- Mobile US, Inc. combined with Sprint in April 2020 creating a stronger, more efcient competitor in the longer term. T-Mobile is in the process of integrating Sprint's operations into its own.

Operating Cost and Financial Flexibility: Fitch believes AT&T has the operating cost flexibility to mitigate the impact of a weakened economy to certain revenue streams on a consolidated basis. The company's financial flexibility is supported by solid and improved FCF after the 2018 Time Warner acquisition, committed revolver availability and improving distribution of long-term debt maturities. Material cash uses include dividends and capital spending. Fitch believes there would be a modest level of capex flexibility in a stress scenario, and wireless capital spending, including 5G, remains a priority.

Asset Sales: AT&T has been monetizing noncore assets since 2019. Fitch's forecast includes total asset sale proceeds of approximately $9 billion in 2021 (including the formation of New DIRECTV) and approximately $2 billion-$3 billion annually beginning in 2022. dback e

Parent Subsidiary Linkage: Fitch believes the parent-subsidiary linkage between AT&T e F and New DIRECTV will be moderate and is based on a combination of factors including the size of New DIRECTV and materiality to AT&T and the importance of New DIRECTV as a content distributor for AT&T's Warner Media business. Given the pro forma effect of the transaction based on YE 2020 results is slightly leveraging to AT&T (an estimated 0.1x), Fitch's forecast does not reect a reconsolidation or proportional consolidation of New DIRECTV back into AT&T. Should the effect reverse, and a form of reconsolidation have an effect of 0.1x or more, and there are no other material changes to the relationship between the two companies, Fitch will include the impact on AT&T's credit prole. https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-at-t-long-term-idr-to-bbb-outlook-stable-12-03-2021 4/13 2021/3/15 Fitch Downgrades AT&T's Long-Term IDR to 'BBB+'; Outlook Stable

DERIVATION SUMMARY

AT&T's rating reects a large scale of operations, diversied revenue streams by customer and technology, and relatively strong operating protability. Current leverage is moderately high for the rating. The company's principal competitor is Verizon Communications Inc. (A-/Stable), as both companies compete head to head in the wireless and business services segments, where they are among the largest operators.

In wireless, AT&T faces competition from T-Mobile US, Inc. (BB+/Stable) and a host of smaller regional carriers. Fitch believes T-Mobile, following its acquisition of Sprint in April 2020, will have greater resources to compete in developing areas, such as the deployment of a nationwide 5G network and corresponding service offerings.

In the enterprise business, in addition to Verizon, AT&T faces competition from a number of carriers, such as Lumen Technologies, Inc. (BB/Stable). Cable operators are strong competitors in the residential and small business segments for voice and data services, in addition to competing with AT&T in the video-distribution business.

AT&T has similar business offerings to European peers but does not compete directly with its counterparts. These carriers include Deutsche Telekom AG (BBB+/Stable), Vodafone Group Plc (BBB/Stable) and Orange S.A. (BBB+/Stable). AT&T, with more than $172 billion in revenue in 2020, is materially larger than the largest of these peers, Deutsche Telekom. AT&T has similar leverage to its European peers, in line with a similar rating.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within The Rating Case for the Issuer: dback e e --For 2021 and 2022, Fitch has assumed AT&T's revenue declines in the mid-single F digits, reecting the exclusion of the results of the video business beginning in the 2H21; --Thereafter, with a rebound at Warner Media and improving results in the telecom part of the business, revenue grow at a low single-digit pace; --EBITDA margins are forecast in the mid-30% range in the forecast, as EBITDA margins improve due to the deconsolidation of the video business (2020 EBITDA margin of 14%); --Excess free cash flow will be used to repay debt; https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-at-t-long-term-idr-to-bbb-outlook-stable-12-03-2021 5/13 2021/3/15 Fitch Downgrades AT&T's Long-Term IDR to 'BBB+'; Outlook Stable --Fitch estimates consolidated gross capital investments are approximately $21 billion annually; --Adjustments for outstanding equipment installment plan receivables related to financial services operations (assessed using a debt-to-equity ratio of 4x beginning in 2021 to reect the 'BBB+' IDR) resulted in a reduction of the level of debt used in calculating our leverage metrics by approximately $10.7 billion. Fitch added back off- balance sheet securitization debt ($5.6 billion) before determining the reduction. Fitch also added back to debt in its forecast receivables sold related to Warner Media's programming and advertising receivables.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Gross core telecom leverage sustained below 2.5x, or FFO net leverage sustained below 2.8x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--Gross core telecom leverage sustained above 3.2x, or FFO net leverage sustained above 3.5x;

--Fitch may take a negative rating action if the anticipated pace of delevering does not lead to gross core telecom leverage below 3.2x by the end of 2023;

--An aggressive capital allocation policy, such as stock repurchases or a material acquisition, could lead to negative action in the absence of a strong commitment to delever;

--Lower than expected EBITDA, as an outcome of competitive pressures, lower

revenues from growth initiatives and weaker than expected cost controls. dback e e F

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (dened as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst- case rating downgrade scenario (dened as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-at-t-long-term-idr-to-bbb-outlook-stable-12-03-2021 6/13 2021/3/15 Fitch Downgrades AT&T's Long-Term IDR to 'BBB+'; Outlook Stable of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector- specic best- and worst-case scenario credit ratings, visit https://www.tchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Strong Liquidity Profile: AT&T did not have any drawings on its revolving credit facilities (RCFs) as of Dec. 31, 2020. AT&T has two RCFs, including a three-year $7.5 billion RCF in place through December 2023 and a five-year $7.5 billion RCF in place through November 2025. The RCFs' principal financial covenants require net debt/consolidated EBITDA, as defined, to be no more than 3.5x.

Additional nancial exibility is provided by a $14.7 billion delayed draw term loan facility entered into in January 2021. The facility is available in a single draw prior to May 29, 2021 and matures 364 days following the borrowing date. The company can use the facility for general corporate purposes, including the acquisition of spectrum.

Cash and cash equivalents totaled $9.7 billion at Dec. 31, 2020, and the company issued CP in January 2021 and had a balance outstanding of approximately $6.1 billion. Fitch expects Fitch-calculated FCF (after dividends) in 2021 to range from $9 billion-$10 billion, down from $11 billion in 2020.

AT&T has arrangements with third-party nancial institutions with respect to the sale of receivables under equipment instalment plans as well as revolving service and trade receivables. Under the equipment instalment plans, receivables are sold for cash and a deferred purchase price. Fitch considers this a nancing activity and makes certain adjustments, by adding the derecognized receivables back to the balance sheet as debt and then adjusting debt for nancing activity at a 4:1 ratio (at the BBB+ IDR level; dback

previously at the A- IDR it was 5:1). The company also has available a $5.3 billion e e revolving receivables program, Fitch adds back the $5.3 billion of net cash proceeds F received under the program to the balance sheet as short-term debt.

Debt Maturities: On a consolidated basis, AT&T and its subsidiaries had long-term note and debenture maturities of approximately $3.3 billion in 2021, $5.0 billion in 2022 and $7.6 billion in 2023. Foreign debt maturing includes the impact from hedges, when applicable.

ESG Considerations: https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-at-t-long-term-idr-to-bbb-outlook-stable-12-03-2021 7/13 2021/3/15 Fitch Downgrades AT&T's Long-Term IDR to 'BBB+'; Outlook Stable Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.tchratings.com/esg

SUMMARY OF FINANCIAL ADJUSTMENTS

Adjustments for outstanding equipment installment plan receivables related to nancial services operations (assessed using a debt-to-equity ratio of 4x) resulted in a reduction of the level of debt used in calculating our leverage metrics by approximately $10.7 billion (YE 2020). Fitch added back off-balance sheet securitization debt ($5.6 billion) before determining the reduction. Fitch also added back to debt in its forecast receivables sold related to Warner Media's programming and advertising receivables. Fitch added certain preferred securities to debt: Tower Holdings LLC, Telco LLC and AT&T Mobility II LLC (the portion owned by unrelated third parties), increasing debt by approximately $10.7 billion and reducing non-controlling interests by a like amount.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

FITCH RATINGS ANALYSTS

John Culver, CFA Senior Director Primary Rating Analyst +1 312 368 3216 dback e

Fitch Ratings, Inc. e F One North Wacker Drive Chicago, IL 60606

William Densmore Senior Director Secondary Rating Analyst +1 312 368 3125

David Peterson Senior Director https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-at-t-long-term-idr-to-bbb-outlook-stable-12-03-2021 8/13 2021/3/15 Fitch Downgrades AT&T's Long-Term IDR to 'BBB+'; Outlook Stable Committee Chairperson +1 312 368 3177

MEDIA CONTACTS

Elizabeth Fogerty New York +1 212 908 0526 elizabeth.fogerty@thetchgroup.com

Additional information is available on www.tchratings.com

APPLICABLE CRITERIA

Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) Corporate Hybrids Treatment and Notching Criteria (pub. 12 Nov 2020) Sector Navigators - Addendum to the Corporate Rating Criteria (pub. 22 Dec 2020) Corporate Rating Criteria (pub. 22 Dec 2020) (including rating assumption sensitivity)

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)

ADDITIONAL DISCLOSURES

Dodd-Frank Rating Information Disclosure Form Solicitation Status Endorsement Policy dback e e

ENDORSEMENT STATUS F

Ameritech Capital Funding Corp. EU Endorsed, UK Endorsed AT&T Corp. EU Endorsed, UK Endorsed AT&T Inc. EU Endorsed, UK Endorsed AT&T Mobility II LLC EU Endorsed, UK Endorsed AT&T Mobility LLC EU Endorsed, UK Endorsed BellSouth Capital Funding Corp. EU Endorsed, UK Endorsed BellSouth Corp. EU Endorsed, UK Endorsed BellSouth Telecommunications, Inc. EU Endorsed, UK Endorsed DIRECTV Holdings LLC EU Endorsed, UK Endorsed https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-at-t-long-term-idr-to-bbb-outlook-stable-12-03-2021 9/13 2021/3/15 Fitch Downgrades AT&T's Long-Term IDR to 'BBB+'; Outlook Stable Indiana Bell Telephone Co. EU Endorsed, UK Endorsed Michigan Bell Telephone Co. EU Endorsed, UK Endorsed New Cingular Wireless Services, Inc. EU Endorsed, UK Endorsed Pacic Bell Telephone Company EU Endorsed, UK Endorsed Warner Media, LLC EU Endorsed, UK Endorsed Wisconsin Bell Telephone Company EU Endorsed, UK Endorsed

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