Fitch Rates Telephone & Data Systems' Debt Offering `A-'

Business Wire, Nov 28, 2001

Business Editors

CHICAGO--(BUSINESS WIRE)--Nov. 28, 2001

Fitch has assigned an `A-` rating to Telephone & Data Systems Inc.'s (TDS) proposed offering of $250 million of 40-year unsecured notes under a $1 billion shelf registration statement filed in October 2001.

Proceeds from the offering will be used to repay short-term debt and for general corporate purposes. The Rating Outlook for TDS is Stable.

TDS' rating incorporates the low business risk associated with TDS Telecom's asset concentration in less-competitive suburban and rural markets, stable cash flow associated with TDS' local exchange and wireless businesses and robust marketable securities portfolio. The investment portfolio affords it increased financial flexibility depending on TDS' willingness and ability to monetize its marketable securities. The rating also takes into account a limited amount of share repurchases and small leveraging acquisitions, as TDS management has been conservative acquirers in the past.

During the third quarter, the slowing economy reduced the volume of traffic in United States Cellular Corporation's (U.S. Cellular) retail stores, which resulted in fewer net additions. Given the further uncertainty in economic conditions, the aggressive competition from nationwide operators and the impacts of migrating customers to digital, U.S. Cellular's cash flow growth is expected to be moderate over the near term. This has been witnessed in the revenue growth for the first nine months of 2001 of 10.8% versus operating cash flow growth of 4.8%. Positively, U.S. Cellular's focus on exceptional customer service has allowed it to generate an attractive churn rate of 1.8% for postpaid subscribers, resulting in more stable cash flows. Nevertheless, higher-than-expected pressure on U.S. Cellular's retail prices and/or customer churn would weaken credit fundamentals.

In addition, capital requirements are expected to remain high due to build-out requirements associated with recent acquisitions, network upgrades and capacity enhancements of its existing wireless network. An additional consideration involves the funding of NextWave spectrum and startup costs with U.S. Cellular's designated entity partner, Black Crow. While there is risk associated with obtaining final congressional approval of the settlement and uncertainty regarding the overall funding requirements for Black Crow and the timing of a network build-out plan, the rating assumes that TDS management would develop any necessary alternative funding plans to address the impacts that its relationship with Black Crow would have on its `A-` rating.

Similar to other higher rated telecom companies, Fitch continues to believe that negative event risk is present with TDS Telecom and U.S. Cellular, as both companies will continue to seek growth opportunities. Accordingly, on Nov. 16, 2001, TDS announced that it had entered into a definitive agreement to acquire MCT Inc., a privately held local exchange telephone company in New Hampshire. MCT currently serves 18,000 access lines, 4,000 Internet and DSL customers and 2,300 cable TV customers.

TDS' debt-to-EBITDA for the first nine month period ending September 30, was approximately 2.1 times (x). Interest coverage was approximately 6.9x. Fitch does not expect the company's leverage to improve materially in the near term due to the aforementioned capital requirements and pressure on its operational results.