DBRS Upgrades AT&T Corporation’s Ratings

Dominion Bond Rating Service (“DBRS”) has today upgraded all the previous long-term ratings of AT&T Corporation (“Original AT&T” or the “Company”) to BBB (high)p from BB (high)p. In addition, DBRS has introduced a rating of Ap for the Guaranteed Euro Notes (€721 million outstanding, 6% original coupon, due November 2006) based on the unconditional and irrevocable guarantee of AT&T Inc. (formerly SBC Communications Inc.) on this one security only. All trends are now Stable. As such, this concluded DBRS’s review of Original AT&T which began on January 31, 2005, when AT&T Inc. announced its intention to acquire Original AT&T.

DBRS notes that today’s rating actions are a result of AT&T Inc. formally closing its acquisition of Original AT&T on November 18, 2005. This is expected to result in the business risk profile improving for Original AT&T due to its 100% equity ownership by a much larger communications entity, AT&T Inc. Although Original AT&T will now also have access to even greater financial resources, DBRS acknowledges that the Company’s previous ratings were limited mainly by its operational challenges, and that its financial profile was not and continues not to be a major limitation in regards to its ratings.

With the acquisition by AT&T Inc., DBRS believes that Original AT&T has the ability to alleviate several factors that were previously pressuring its core Business segment, and this has resulted in DBRS “notching up” the Company’s ratings based on the following expectations. Original AT&T now has the ability to implement significant cost reductions that should help stabilize its Business segment’s EBITDA margins and potentially mitigate the trend of declining cash flow from operations that the Company has experienced over the past couple of years. In addition, DBRS notes that Original AT&T’s revenues going forward should benefit from the incremental traffic that will be moved onto its network from the former SBC Communications Inc., along with the ability to cross-sell Cingular Wireless’ services to its Business customers. The previous lack of a direct wireless offering was a significant challenge within AT&T’s Business product line. Finally, with the combination of these two entities, Original AT&T will now face one less competitor on both the consumer and business side, which should also facilitate Original AT&T gaining further inroads into the business customer base in the former SBC Communications Inc.’s territory.

DBRS notes that its rationale for the rating differential between Original AT&T and the new AT&T Inc. (rated at Ap, please see separate press release issued today) pertains to: (a) the lack of a guarantee on most of the Original AT&T’s unsecured debt from AT&T Inc. along with (b) the uncertainty over how AT&T Inc. will use future free cash flow and the existing cash on Original AT&T’s balance sheet. Another consideration supporting the rating differential is the continued overcapacity and pricing pressure in the business communications market pertaining to both voice and data services that is not supportive of a rating in the “A” category. This negative operating environment could be complicated by Verizon Communications Inc.’s acquisition of MCI Inc. which is expected to close shortly. If these negative market conditions were to persist indefinitely, DBRS could become concerned that AT&T Inc. could reduce its support to Original AT&T, both financially and more importantly operationally. However, DBRS does acknowledge that the probability of this occurring appears quite small at this time.

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