Aug. 20, 2009 (Business Wire) -- Fitch Ratings has affirmed the 'BBB+' Issuer Default Ratings (IDRs) of Telephone and Data Systems, Inc. (TDS) and its subsidiary United States Cellular Corp. (USM). The Rating Outlook on TDS and USM has been revised to Negative from Stable. Approximately $1.6 billion of debt is affected by Fitch's action.
Fitch has affirmed the following ratings:
TDS
--IDR at 'BBB+';
--Senior unsecured debt at 'BBB+';
--Revolving credit facility at 'BBB+'.
USM
--IDR at 'BBB+';
--Senior unsecured debt at 'BBB+';
--Revolving credit facility at 'BBB+'.
While TDS has a solid financial profile due to its healthy liquidity position, financial flexibility, a conservative balance sheet and strong credit protection metrics, the Negative Outlook reflects Fitch's concern over increasing business risk in TDS' operating profile. This is evidenced by the weakening operating results at both business segments, which caused management to revise guidance for 2009. Longer-term, it is uncertain whether TDS can return to sustaining growth in its revenues and operating cash flow as a regional operator due to the lasting effects of the competitive environment, a weak economy and high subscriber penetration rates. During the past couple of years, USM's year-over-year revenue growth has slowed from the low teen double digit range to a low single digit revenue decline for the latest quarter. In the past couple of quarters, average revenue per user (ARPU) pressure has also increased as steady growth from data revenues has not offset the voice ARPU erosion and roaming ARPU declines.
Additionally, with postpaid churn up 30 basis points in the second quarter due primarily to competitive pressures affecting economically sensitive consumers, subscriber growth has turned negative. Fitch believes that while churn trends could moderate somewhat over the next couple of quarters, USM's growth prospects are likely challenged over the rating horizon with expectations for modestly negative subscriber growth for the second half of 2009 and into 2010. Consequently, while Fitch expects TDS will generate meaningful levels of free cash flow (FCF) in 2009, future FCF will be pressured due to the loss of roaming revenue, subscriber impacts and the higher costs associated with certain strategic initiatives in both wireless and wireline, including upgrades to back office capabilities.
USM and TDS Telecom have pursued several initiatives to stabilize operating results and restore growth. During the next several quarters, as the marketplace continues to transform itself, if Fitch determines the company cannot sustain positive revenue growth longer-term due to more permanent changes in market dynamics, a one-notch downgrade is likely.
