Moody's Investors Service said Monday it has placed At&T Inc.'s Baa1 senior unsecured rating on review for a possible downgrade, after the phone company said it has agreed to acquire Time Warner Inc. in a deal valued at $85.5 billion. The company intends to fund the deal with 50% equity and 50% cash and Moody's is expecting the company's gross leverage will rise to about 3.5%, adding 0.7% to reported leverage at end 2018, assuming the deal closes next year. "The deal's financing costs will consume the majority of acquired free cash flow due to an incremental $2.3 billion in annual dividends and $1.3 billion in additional after-tax annual interest expense," the agency said in a statement. "Moody's believes that given AT&T's limited excess cash after dividends and modest EBITDA growth potential, that organic leverage reduction is limited to around 0.1 times to 0.2 times annually." The company could boost that reduction via asset sales, including selling parts of each company. Credit positives from the deal include the additional scale it will give AT&T, the boost to growth potential and lower capital intensity, said Moody's. AT&T shares were trading down 1.7%, but are up 7.3% in the year so far, while the S&P 500 has gained 5.3%.
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