Fitch Rates AT&T's Proposed Debt Issuance 'A'; Outlook Stable.

CHICAGO -- Fitch Ratings has assigned an 'A' rating to AT&T Inc.'s (AT&T) proposed offering of five-, 10- and 30-year senior unsecured debt. Proceeds will be used for general corporate purposes. The Rating Outlook is Stable.

AT&T's rating incorporates Fitch's expectations that, on a long-term basis, the company has the financial flexibility to maintain leverage in a range appropriate for the current rating category. At the end of 2008, leverage approximated 1.75 times (x), toward the high end of Fitch's expectations for the rating category and higher than AT&T's target level of 1.3x to 1.5x. In response to the current uncertain financial market and economic environment, in the second half of 2008 AT&T committed to use free cash flow to reduce debt and expects to continue to due so in 2009. In the second half of 2008, the company reduced debt by $5.2 billion, after halting repurchases of stock in the third quarter of 2008. Debt rose in the first half of 2008 due to the repurchases and investments in the strongly growing wireless business including spectrum acquisitions (the Federal Communications Commission's 700-megahertz auction and Aloha Partners, L.P.). In 2009, the pending acquisition of Centennial Communications Corp. will partly offset the anticipated reduction in debt. Fitch believes AT&T's leverage metric will be relatively stable in 2009 and expects that in the intermediate term EBITDA growth and potential debt reduction will return AT&T's credit-protection metrics back into AT&T's target range.

AT&T's ratings also reflect its diversified revenue mix, its significant size and economies of scale as the largest telecommunications operator in the U.S., as well as Fitch's expectation that AT&T will benefit from continued growth in wireless operating cash flows. In the fourth quarter of 2008, wireless segment revenues grew 13.2% to $12.9 billion, while generating approximately 41% of total segment revenues. While wireless revenue growth is expected to slow in 2009, wireless data revenue growth is expected to remain strong, and wireless margins are expected to improve as there will be diminishing pressure from the high acquisition costs related to the marketing of Apple, Inc.'s 3rd generation iPhone. In 2009, AT&T expects consolidated revenue to grow in the low single digits as wireless revenue growth is expected to outpace increased pressure from the economy on wireline revenues.

Issues to watch regarding AT&T's ratings include the pressure of economic weakening on its lines of business during 2009 and competition in the consumer line of business. To offset the effects of these factors on cash flow, AT&T must continue to be successful in growing wireless revenues, improving wireless margins, growing video revenues and controlling costs.

At the end of 2008, AT&T had $75 billion in debt outstanding, and cash amounted to $1.8 billion. AT&T's liquidity is supported by a five-year credit facility that expires in July 2011 with an estimated $9.4 billion of availability (Lehman Brothers Bank, Inc. composed $595 million of the original $10 billion facility). The principal financial covenant requires debt-to-EBITDA, as defined in the agreement, to be no more than 3x. Liquidity also arises from free cash flow, which in 2008 amounted to $3.8 billion after dividends. Cash flow in 2009 is expected to be relatively stable, as increased cash tax payments, among other items, will generally be offset by a 10% to 15% reduction in capital spending from the $20.3 billion recorded in 2008.

AT&T's debt maturities in 2009 and 2010 are approximately $7.5 billion and $3.8 billion, respectively. The maturities incorporate debt that can be put to AT&T, where appropriate.

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