Fitch Affirms Verizon's IDR at 'A-'; Outlook Stable

Fitch Ratings has affirmed the 'A-' Issuer Default Ratings (IDRs) and senior unsecured debt ratings for Verizon Communications Inc. (Verizon; NYSE: VZ) and its subsidiaries. The company's short-term IDR and commercial paper ratings have been affirmed at 'F2'. The Rating Outlook remains Stable. A full rating list is shown below.

KEY RATING DRIVERS

Competitive Position: The ratings are supported by Verizon Wireless' (VZW) strong competitive position, as evidenced through industry-low churn rates, high margins and the extensive coverage of approximately 98% of the U.S. population with its 4G LTE network. These factors are balanced against high leverage for the rating, which stems from the February 2014 acquisition of the remaining 45% stake in VZW.

Cash Flows and Capital Spending: The generation of strong FCF at VZW will be a key driver of debt reduction over the next several years. VZW's simple FCF (EBITDA less capital spending) for the last twelve months ended Sept. 30, 2015 was approximately $26.3 billion. In 2015, management's guidance is for consolidated capital spending of $17.5 billion to $18 billion. Capital spending in 2016 could decline slightly due to the divestiture of access lines. Investment in the wireless network continues to be an area of emphasis due to the strong demand for 4G LTE capacity for rapidly growing data services.

Leverage: As of Sept. 30, 2015, Verizon's gross consolidated leverage (excluding off balance sheet securitizations) was 2.48x, and total adjusted debt/EBITDAR, which includes off balance sheet securitizations, approximated 2.9x. Fitch expects core telecom leverage, which excludes off balance sheet securitizations and potential public and on-balance sheet asset-backed securitizations, to decline to approximately 2.3x by 2017, while total adjusted debt/EBITDAR is expected to approximate 2.9x.

AOL: In June 2015, Verizon purchased AOL Inc. (AOL) for approximately $3.8 billion in cash consideration. In June and July 2015, Verizon repaid $0.1 billion and $0.3 billion of debt assumed in the transaction. Strategically, the acquisition of AOL and its advertising platform and digital content will support Verizon's forthcoming mobile video offerings.

Spectrum Funding and Tower Sale: In the first quarter of 2015, Verizon used cash and a $6.5 billion term loan to fund the remaining $9.5 billion owed for spectrum acquired in the Federal Communications Commission's (FCC) AWS-3 auction. The term loan was reduced by proceeds received from a $5 billion transaction with American Tower Corp. whereby Verizon sold exclusive rights to the majority of its towers, and sold a small number of towers outright. The term loan was further reduced by $1 billion in the third quarter 2015.

Wireline Asset Sale: In 2016, Verizon expects to complete the sale of its wireline operations in California, Texas and Florida to Frontier Communications Corp. for approximately $10.5 billion. In total, these operations produce less than 5% and 4% of consolidated revenues and EBITDA, respectively. Approximately $600 million of debt will travel with the subsidiaries being sold. The net after-tax proceeds of $6.8 billion are expected to be used to reduce debt. All necessary regulatory approvals have been obtained but certain operational steps remain to be completed prior to the closing of the transaction.

Stock Repurchases: In the first half 2015, Verizon used a portion of its cash on hand to fund a $5 billion accelerated stock repurchase plan.

KEY ASSUMPTIONS

--Fitch assumes Verizon revenues grow in the mid-single-digit range over the near term, excluding the effect of the asset sales, and that margins are relatively stable in the mid-30% range.

--Debt reduction in the core business, combined with EBITDA growth, is expected to reduce core telecom leverage (which excludes off-balance sheet securitization and potential public and on-balance asset-backed securitization) to the low 2x range by 2017/2018.

--VZW will continue to generate strong free cash flow (FCF). VZW's simple FCF (EBITDA less capital spending) for the LTM ended Sept. 30, 2015 was approximately $26.3 billion.

--In 2015, Fitch expects consolidated capital spending to be in line with company guidance of $17.5 billion to $18 billion, with a modest decline expected in 2017 once the sale of access lines to Frontier is completed in early 2016. Investment in the wireless network continues to be an area of emphasis due to the strong demand for 4G LTE capacity for rapidly growing data services.

--Fitch has included modest spending on spectrum in the FCC's 600 MHz TV broadcast auction, currently anticipated to occur in early 2016. Spectrum spending approaching or exceeding levels spent in the AWS-3 auction will be an event-driven consideration.

RATING SENSITIVITIES

Positive Rating Action: Fitch believes a positive rating action is unlikely in the foreseeable future, given the leverage incurred in the 2014 Vodafone transaction.

Negative Rating Action: Fitch may take negative rating action if operating performance causes deleveraging to take place at a materially slower-than-anticipated pace, either alone or in combination with material debt-financed acquisitions. Discretionary management moves that cause core telecom leverage (which excludes off-balance sheet securitization and potential public and on-balance sheet asset-backed securitization) to rise above 2.5x (or total adjusted debt/EBITDAR to rise above 3.25x), such as another material acquisition or stock repurchases, could lead to a negative action in the absence of a strong commitment to deleverage.

LIQUIDITY

Strong Liquidity Profile: Verizon's liquidity is supported by its reported consolidated cash balances, which were $3.9 billion at Sept. 30, 2015, and by its revolving credit facility (RCF). The $8 billion RCF matures in July 2018. Fitch expects Verizon to maintain aggregate commercial paper (CP) balances within a level fully backed by the RCF. The credit facility has no ratings triggers or other restrictive financial covenants, such as leverage or interest coverage tests.

Debt Maturities: Relative to the company's cash, RCF availability, and expected FCF, Fitch believes upcoming debt maturities are manageable. On a consolidated basis, as of Sept. 30, 2015 Verizon and its subsidiaries had expected public debt maturities of approximately $1.7 billion remaining in 2015 and $6.2 billion in 2016.

Fitch has affirmed the following ratings with a Stable Outlook:

Verizon Communications Inc.

--Long-term IDR at 'A-';

--Senior unsecured debt at 'A-';

--Senior unsecured bank facility at 'A-';

--Senior unsecured term loan due 2019 at 'A-';

--Senior unsecured term loan due 2016 at 'A-';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Cellco Partnership

--IDR at 'A-';

--Senior unsecured debt (co-issued with Verizon Wireless Capital LLC) at 'A-'.

Verizon Wireless Capital LLC

--Senior unsecured debt (co-issued with Cellco Partnership) at 'A-'.

Alltel Corp.

GTE Corp.

Verizon Delaware

Verizon Maryland

Verizon New England

Verizon New Jersey

Verizon New York

Verizon Pennsylvania

Verizon Virginia

--IDR at 'A-';

--Senior unsecured at 'A-'.

Verizon Global Funding (merged into Verizon in 2006)

--Senior unsecured at 'A-'.

In addition, Fitch is maintaining the following issuers and their debt securities on Rating Watch Negative due to their expected sale in 2016:

Verizon California

Verizon Florida

--IDR 'A-';

--Senior unsecured 'A-'.

GTE Southwest

--IDR 'A-';

--First mortgage bonds 'A-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997044

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997044

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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