Moody's Investors Service has downgraded Genuity from Baa2 to Ba1 following indications that Verizon Communications, fearing equity dilution, is less likely to recapture the company. The Federal Communications Commission required GTE to give up all but 10% of its Genuity ownership when it merged with Bell Atlantic in 2000 to create Verizon. The newly formed company was given the option to increase its ownership once it opened up its local networks to competition. Verizon expects to finish this task by the end of this year, but its management has stated that it would not reintegrate the company unless Genuity's financial position improves, explained Dennis Saputo, Moody's analyst. Genuity would warrant a deep-junk rating of B3 or lower standing alone, said Saputo, pointing to its significant operating losses and developmental stage.
Moody's sees the probability of Verizon exercising its option diminishing for three reasons: Genuity is much weaker than expected, growth in the sector has diminished, and many companies offering similar services as Genuity can be bought at a discount. Verizon has cheap alternatives, said Saputo. Weak IT spending over the last year and a half has plagued the company, which provides Internet infrastructure services to enterprise companies, but Saputo believes that IT spending will pick up. "It's just a matter of time before IT spending recovers because more and more businesses today are moving towards putting [services] on the net." A company spokesman noted a statement in a Moody's press release that indicates Genuity has the liquidity to buy time to improve its operating performance to prepare for Verizon's recapture.
* Moody's has placed American Cellular on review for a downgrade, noting the likelihood of a multiple notch downgrade is high. The company suffers from a number of issues including the need for covenant relief from its bank group by the end of June, poor financial performance, and a weak environment for rural cellular companies. In addition, Moody's points out that AT&T Wireless, which holds a 50% stake in the company, has shown an increasing lack of support. Moody's believes that American Cellular would strategically benefit from its relationship with the third largest U.S. mobile phone service provider. The company is now highly leveraged at 10 times debt to EBIDTA. Calls to Bruce Knooihuizen, v.p. and cfo, were referred to an investors relations spokesman who did not return calls by press time.
* Nextel Communications has also been put on review for a possible downgrade with Moody's focusing on the company's need to generate free cash flow in a reasonable amount of time. Amortizing term loans, reducing revolver commitments, cash interest payments, and dividend payouts will burden the company's good liquidity position in the near future, according to the rating agency. In addition, the company will need to increase its capital expenditure for network upgrades in the face of credit agreement leverage step-downs. Repeated calls to Paul Saleh, Nextel executive v.p. and cfo, were not returned by press time.