DBRS Confirms AT&T Inc. at Ap & R-1 (low)p; Trend is Stable

Dominion Bond Rating Service (“DBRS”) has today confirmed the long-term ratings of AT&T Inc. [“AT&T Inc.” or the “Company”, formerly SBC Communications Inc. (“SBC”)] and its affiliated issuers at Ap and has confirmed AT&T Inc.’s short-term rating at R-1 (low)p. Additionally, DBRS has upgraded the majority of AT&T Corporation’s (“Original AT&T”) debt to BBB (high)p from BB (high)p, and has initiated a rating on Original AT&T’s Euro notes issue (€721.2 million 6.00% coupon that matures in November 2006) at Ap, reflecting the unconditional and irrevocable guarantee that AT&T Inc. has extended to this security. (See separate press release on AT&T Corporation). All trends are Stable. Shortly after the transaction closed, SBC changed its name to AT&T Inc.

This rating action reflects the completion of AT&T Inc.’s cash and share acquisition of Original AT&T for roughly US$16 billion (equity value) and the assumption of roughly US$6 billion of Original AT&T net debt. As such, this concludes DBRS’s review of AT&T Inc. that began on January 31, 2005, when this transaction was originally announced.

AT&T Inc.’s ratings reflect three factors:

Firstly, DBRS expects AT&T Inc. to use Original AT&T’s business segment to enhance its enterprise customer expansion plans, both within its 13 state incumbent territory and outside this southwestern state region and, as such, have the ability to: (1) realize sizeable synergies from Original AT&T and its own business customer operations (roughly US$15 billion of synergies have been laid out on a NPV basis); and (2) potentially stabilize the fundamentals for the long-haul and managed services segment by reducing a competitor and adding to Original AT&T’s leadership position in this segment.

Secondly, AT&T Inc. assumed modest financial risk as a part of this transaction given the sizeable equity component, Original AT&T’s reasonable financial risk profile (i.e. net debt–to-EBITDA of less than 1.0) and DBRS expects both entities to generate good levels of free cash flow going forward. While DBRS acknowledges that AT&T Inc. has applied this free cash flow to share repurchases in 2005 (at least US$1.5 billion expected for 2005) and will likely continue to do so in the future, the Company is expected to maintain strong key credit ratios that are consistent with its peers at the “A” rating.

Finally, DBRS expects the additional traffic that AT&T Inc. can bring to Original AT&T’s network (voice and data) from its significant customer base of over 100 million customers and the adoption of the dominant AT&T brand will benefit both Original AT&T and AT&T Inc.’s current business models.

DBRS notes that in its local incumbent wireline business AT&T Inc. has benefited from some stability in the competitive environment over the past 12 months with primary retail access line erosion slowing (due to a change in regulatory rules – UNE-P), strong growth in new services (such as long-distance and DSL) and cost-cutting efforts. While DBRS acknowledges that the competitive environment will likely re-intensify for AT&T Inc., in its incumbent territory in 2006 and beyond, with the cable operators expected to scale their voice deployments, this is expected to be manageable as AT&T Inc. continues to gain traction in bundling its residential customers with multiple services (local, long-distance, DSL, wireless, and a resold video service). Furthermore, AT&T Inc. is expected to further enhance this ability with its entry into offering its own video services over the next couple of years (through its Project Lightspeed deployment).

Finally, while DBRS expects AT&T Inc. will need to overcome additional execution risk associated with integrating Original AT&T – in addition to the ongoing integration that is undertaken at its 60% owned wireless business, Cingular Wireless, LLC (“Cingular”), DBRS believes the Company has the ability to overcome these challenges and it should be well-positioned to serve both residential and, now, a larger base of business customers, with a full suite of wireline and wireless services through its incumbent operations and those of its investments in Cingular and Original AT&T.

Note:
p- This rating is based on public information.