(Source: Business Wire)
Fitch believes that growing event risk associated with economic, competitive and regulatory pressures will weaken the credit profile of most operators within the U.S. telecommunications and cable sector in 2009. Growing unemployment, continuing home foreclosures, the acceleration of cord-cutting, evolution of wireless smart-phone-based data services, and a changing regulatory environment with a new Federal Communications Commission (FCC) make-up and key regulatory programs up for reform represent some of the challenges to the industry in 2009. These challenges will result in a changing landscape and difficult operating environment for many companies.
Fitch believes that revenue and EBITDA growth for U.S. telecommunications and cable operators will slow in 2009, but that overall aggregate capital spending will likely be flat compared to 2008. As a result, free cash flow will weaken in 2009 for the industry and overall leverage will increase. Fitch expects that the industry weakening will move some companies to the lower end of their current ratings and, if more severe than expected, could lead to negative rating actions during 2009.
Economic Pressure
Economic pressure has been material for the industry in 2008, particularly related to housing. The increase in foreclosures along with the weak new-home growth has taken away an important offset to competition for legacy wireline voice and video service providers. Without this offset, incumbent local exchange carriers (ILECs) have experienced increased access-line losses. Similarly, cable multiple system operators (MSOs) have also experienced increased basic video subscriber losses. Additionally, the weak new-home growth and high data penetration is resulting in slowing high-speed data growth. This home trend is expected to continue in 2009 and Fitch believes it will in part result in even greater erosion for switched access lines and basic video subscribers for ILECs and cable MSOs, respectively. Another negative economic trend that will put pressure on the industry is unemployment, which will likely have a negative impact on business service revenue for all operators. As unemployment rises, companies reduce or groom their business service requirements. While some services are contractual, this typically only applies to government entities and large business contracts are generally for only three years with a portion renewing every year. Therefore, growing unemployment will lead to lower demand for business services; this is particularly true as unemployment has increased significantly in the financial services sector which is a heavy user of telecommunications services. Fitch also expects that unemployment and economic pressure will affect small business, which has been a source of relatively strong growth for the industry over the past couple years. Thus, Fitch expects that ILECs could see flat to negative growth of aggregate business service revenue in 2009. Likewise, small office and home office (SOHO) commercial service revenue has been a new source of growth for the larger cable MSOs and this should materially slow in 2009 reflecting increasing economic pressure.
Finally, higher unemployment rates will also likely have an impact on wireless operators as it relates to net additions and bad debt. Fitch estimates that net additions will fall in excess of 20% in 2008 compared to 2007. Rising unemployment will likely accelerate this trend in 2009 and result in net additions reaching a level that is nearly half the rate of 2007. The decline in total net additions is particularly severe in prepaid net additions, with those customers expected to be more sensitive to economic stress. Additionally, there is material risk that bad debt will rise in 2009 as lower credit quality post-paid customers are affected by economic pressures and are unable to pay their invoices. While this measure has shown no material change to date, Fitch expects it to increase in 2009, which could pose a significant problem for those wireless operators with material subprime customer bases. Fitch also expects that a rise in churn rates in 2009 is likely as involuntary churn is increased by customers sensitive to the economic pressures present.
Competitive Pressure
Competition remains a strong influence on the U.S. telecommunications and cable industry, particularly as service overlap by ILECs, wireless operators, and cable MSOs has become more widespread. Both ILECs and cable MSOs have used bundled service offerings to compete for retail customers.
