NEW YORK-The current and potential impact of deregulation and competition on the telecommunications industry has caused Standard & Poor’s Corp. to review and modify its debt evaluation criteria, the credit rating agency announced March 31.
As part of its announcement, the New York-based rating agency said it upgraded ratings affecting about $12 billion of publicly sold debt and preferred stock. It also downgraded ratings affecting about $8 billion of debt and preferred stock.
On the up side were: GTE Corp., GTE Finance Corp., GTE Delaware L.P., GTE Northwest Inc., GTE Southwest Inc., GTE Hawaiian Telephone Co. Inc., GTE South Inc., Pacific Telesis Group, PacTel Capital Resources, Pacific Telesis Financing I and II, SBC Communications Inc. and SBC Communications Capital Corp.
On the down side were: Alltel Georgia Communications Corp., GTE Florida Inc., GTE North Inc., Rochester Telephone Corp. and U S West Communications Inc.
During a teleconference to discuss their new approach, S&P officials said they were withholding judgment on the outstanding debt of Bell Atlantic Corp. and Nynex Corp. until the proposed merger is a fait accompli.
State regulators traditionally have served as the barrier between regional Bell operating companies and their parent corporations, which might wish to siphon off the cash in their subsidiaries to finance ventures like wireless telecommunications. But those barriers, which individual state regulatory agencies have imposed to different degrees in order to protect local wireline rate payers, are starting to fall. As those constraints erode, so does the protected status of RBOC debt, S&P officials said.
“Regulatory separation is the factor that historically has allowed operating companies to have higher debt ratings than their parents,” said Richard Siderman, managing director of Standard & Poor’s telecommunications and cable ratings group. “[This is] as opposed to non-regulated corporations, whose subsidiaries’ ratings are constrained by the rating of the parent, even if the subsidiary looks more credit worthy. It’s the weakest-link philosophy.”
During the next five-to-ten years, he said telecommunications carriers would evolve into the category of typical corporations, as opposed to regulated or semi-regulated utilities. “That is why they are becoming more difficult credits (to evaluate) going forward,” Siderman said.
Asked if legal restrictions written into debt sale agreements could substitute for the role of state regulators in telecommunications’ public debt issues, Siderman said S&P doesn’t believe they can.
“Companies historically have talked about internal controls in the form of covenants, but parents generally have been able (nonetheless) to extract cash from subsidiaries,” he said.
In the complex calculus of telecommunications debt evaluation, Standard & Poor’s reviews a variety of factors. In determining the consolidated rating of a telecommunications parent company, the agency develops, “a risk profile of the various business segments, including cellular,” Siderman said.
Before rating a local exchange carrier higher than its parent, S&P will, among other things, review the degree of regulatory separation between parent and subsidiary and whether or not the subsidiary has the potential to weaken the credit worthiness of its parent company, he said.
In response to another question, Siderman said Standard & Poor’s right now thinks it is unlikely that a parent company would “walk away from a subsidiary.” He added that a more complete answer to that kind of speculation wouldn’t be available, “until we see more competition among [local exchange carriers] and more maturation of cellular at the parent company (level).”
