SBC's bid to take control of DirecTV has bond analysts wary of debt load. (Media & Technology).

SBC Communications Inc. may put its credit rating at risk by pursuing an acquisition of DirecTV.

SBC, parent of what was formerly known as Pacific Bell, may need to increase borrowings by 50 percent to finance the purchase of DirecTV from El Segundo-based Hughes Electronics Corp., which could be worth as much as $20 billion.

It also could increase SBC's debt-to-profit ratio to the equivalent of companies rated one or two levels below SBC.

"Any acquisition is going to take some time to digest, and that's where you're going to get pressure on ratings," said Moody's Investors Service analyst James Veneau, who was considering lowering his Aa3 level on SBC before the plans were made public.

SBC Chief Executive Edward Whitacre is betting that increased sales generated by buying DirecTV from General Motors Corp. would outweigh the extra borrowing costs that come from lower credit ratings. GM owns Hughes, but has issued tracking stock to public investors.

A reduction of just one level could cost SBC millions of dollars in future interest payments, based on the cost of borrowing for lower-rated rival Verizon Communications Inc.

SBC's bonds yield 4.82. percent and trade at a risk premium, or spread, of 0.85 percentage point more than the comparable Treasury note. Verizon's yield 5.29 percent, a spread of 1.34 percentage points.

Lower yield

SBC's lower yield reflects its higher ratings and indicates investors aren't convinced the transaction will proceed. SBC is in early stages of talks and hasn't made an offer, said people familiar with the matter.

SBC spokesman Larry Solomon declined to comment on the potential bid or the company's credit ratings. Rupert Murdoch's News Corp. and John Malone's Liberty Media Corp. are also considering buying DirecTV.

Ratings on SEC's $22 billion of debt, ranked the fourth-highest among investmentgrade credits, could fall one or two levels, analysts said. SBC is rated AA- at Standard and Poor's and Fitch Ratings. Both ratings companies have a negative outlook on the credit.

AT&T Corp. last year sold its cable business after it failed to boost revenue enough to justify the $104.6 billion spent to build it.

Assuming the company borrows $10 billion to help with the purchase, and funds the rest with some of its $5 billion in cash and sales of assets or stock, its debt would rise to about $32 billion.

That extra borrowing would increase SBC's ratio of debt to earnings before interest, tax, depreciation and amortization to 1.61 times from 1.15 times, said Ned Zachar, an analyst at Thomas Weisel Partners, who rates SBC stock "attractive."

Debt-to-Ebitda is watched by the ratings companies as a sign of a company's ability to meet its obligations. At that level, SBC's debt relative to Ebitda would be more than BellSouth Corp.'s 1.4 times. BellSouth's debt is rated A+ by S&P, a level lower than SBC. Moody's is considering lowering its Aa3 rating on BellSouth.

"The ratings agencies would not look favorably" on the purchase, said Dean Kartsonas, who helps oversee $18 billion of equity, including SBC stock, at Federated Investors Inc. "I don't think they need to own the video component. I'd be disappointed."

SBC's revenue, has declined for two years and Whitacre has forecast further declines for 2003. DirecTV has forecast a sales rise of about 10 percent this year. Whitacre wants to marry the two to offer each customer hundreds of television channels in addition to local and long-distance calling and mobile-phone services.

SBC would have to pay about $20 billion, $15 a share, for Hughes Electronics, analysts said.

A contest against potential rival bidders News Corp. and Liberty Media could drive up the price. Moody's and Fitch analysts said they would assess how well SEC merges the two businesses.

Whitacre has said he plans to use the proceeds of asset sales to reduce the debt. In the past' two months, the company has mised $6.4 billion from the sale of stakes in Bell Canada and Cegetel SA. It also is trying to sell its Sterling Commerce software unit for $1 billion, though' it has yet to find a buyer willing to pay that amount.

Buying Hughes would give SBC a company that expects about $9.5 billion in sales this year, compared with SEC, which forecast sales of about $40 billion, It would also bring as much as. $3 billion in debt' and a history of losses. Hughes reported a net loss of $891.1 million for 2002.