Moody's May Downgrade AT&T

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AT&T's (NYS: T) recently announced increased capital expenditures have prompted credit ratings agency Moody's (NYS: MCO) to place the telecom's A2 commercial paper rating on review for a possible downgrade .

It's not that Moody's thinks spending money on improving AT&T's wireless infrastructure is a bad idea. It even said in its review announcement that it "views the increased wireless capex favorably, as it should improve AT&T's service quality and help the company maintain its position as a leader in the US wireless industry."

Moody's also views the expansion of AT&T's wireline U-verse services (TV, Internet, and phone) in a favorable light, "as it will enable AT&T to remain relevant to consumers who demand higher speed broadband services."


The agency sees capex as necessary for AT&T to stay competitive with rival Verizon (NYS: VZ) , which has quite a lead in terms of 4G LTE coverage nationwide.

Keeping well ahead of distant No. 3 Sprint Nextel (NYS: S) also has new importance now that Sprint will be getting a needed influx of capital from new majority partner SoftBank for its LTE network buildout.

However, the problem Moody's has with AT&T's growth plans lies in how indebted the telecom will become with its increased capital expenditures, and with what Moody's calls its "continued aggressive share repurchase."

The capex and the share repurchasing will move AT&T away from its prior target of 1.5 times debt/EBITDA to a 2.5 ratio, by Moody's calculations.

This is a "strong negative" says Moody's, and will put "many of AT&T's financial metrics ... outside the boundaries expected for an A2-rated issuer." The agency considers 2.0 times adjusted debt/EBITDA a potential downgrade benchmark.

Going into debt to keep up with Verizon and to keep Sprint playing catch-up is one thing, but going to the financial markets to fund a share-repurchase plan is an eyebrow-raiser.

After AT&T's profitable second quarter, the company's board of directors approved a plan to buy back up to 300 million shares and spend up to $11.1 billion in doing so. That was in addition to a 2010 authorization to buy back up to 300 million shares. By the end of June, AT&T had spent $4.6 billion on repurchasing 143.5 million shares.

AT&T chairman and CEO Randall Stephenson said last July that this second share-repurchase plan was an "action [that] allows us to continue returning cash to our shareholders through dividends and buybacks while maintaining a strong balance sheet and investing in the future of our business."

Like Moody's, in the capital-intensive industry AT&T is in, going into a reasonable amount of debt to improve customer service may well be justifiable. But I can't help feeling queasy about "aggressive" stock repurchasing if it brings nothing to the table but an increase in share price.

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The article Moody's May Downgrade AT&T originally appeared on Fool.com.

Fool contributor Dan Radovsky owns shares of AT&T. The Motley Fool owns shares of Moody's. Motley Fool newsletter services recommend Moody's and AT&T. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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