S&P Cites Negative Bias in US Telecom Providers' Rating Outlook
There is a negative bias in the rating outlook of U.S. telecom providers, S&P Global Ratings said in an emailed news release Tuesday on a new report (paid access). "A combination of aggressive shareholder-oriented financial policies, mature industry conditions, intense…
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competition, converging technologies that could lead to increased investments and acquisitions, and spending to acquire wireless spectrum licenses or enhance network capabilities could hurt telecom companies' credit quality over the next couple of years," S&P Global Ratings credit analyst Allyn Arden said. The report cites "low discretionary cash flow" (DCF or "cash from operations minus capital expenditures and dividends") as a "key risk" because it reduces company financial flexibility. "Industrywide DCF is weak because of elevated leverage, including unfunded pensions and other post-retirement obligations, hefty capital spending requirements, and substantial dividend payouts. In aggregate, we estimate that the industry's overall DCF as a percentage of debt is only about 1%-2%," the release said. Arden said that is significant because the companies also face low growth, pressuring their ability to maintain their ratings without allocating more free cash flow to debt reduction.