[November 24, 2014]

Fitch Plans to Rate United States Cellular Debt Issuance

Fitch Ratings expects to rate United States Cellular Corp. (News - Alert)'s (USM) planned debt issuance, which was disclosed on Nov. 24, 2014, when such financing arrangements commence. USM's board of directors has authorized the issuance of up to $500 million of debt through debt securities or other means, including term loans. Proceeds would be used for general corporate purposes, including working capital, capital expenditures and potential spectrum purchases.

In Fitch's view, USM's credit metrics--as well as that of its parent Telephone and Data Systems, Inc. (TDS)--following the issuance of up to $500 million of debt, are expected to remain within the range appropriate for their current 'BB+' Issuer Default Ratings (IDRs) and long-term, senior unsecured debt ratings. USM's ratings consider the consolidated ratings at TDS. The Rating Outlook remains Stable.

KEY RATING DRIVERS

The 'BB+' IDR reflects the challenges USM's wireless operations face in the highly competitive wireless environment, which has led to weak EBITDA margins and lower EBITDA. While subscriber trends in core markets have begun to stabilize in the second half of 2014, operating profitability in 2014 is expected to be suppressed due to billing system issues early in the year as well as higher losses on equipment driven by strong smartphone sales.

Postpaid subscriber additions at USM have been under material pressure for several years. In the fourth quarter of 2013, USM began selling the iPhone (News - Alert) which Fitch believes may reduce voluntary churn over time, and should the company succeed in improving gross additions, may eventually lead to subscriber growth. As results stabilize and potentially improve, increased losses on equipment are expected as USM loads more costly 4G LTE (News - Alert) smartphones onto its network, with the impact being offset by increased service revenue over time. Losses on equipment could come down if there is a strong uptake of equipment installment plans.

The ratings at TDS and USM reflect the current strong liquidity position owing to the substantial cash balances, conservative balance sheet, undrawn revolving credit facilities and long dated maturities. The consolidated company does not have any material maturities until 2033.

Fitch expects TDS's gross leverage to rise to approximately 3.0x-3.1x at year-end 2014, up from 2.1x at year-end 2013. Fitch has included a portion of partnership distributions (at a level which Fitch views is sustainable) received from entities it does not control in its calculations. Assuming participation in upcoming wireless specrum auctions, the sale of its non-core tower business and continued wireless network investment, Fitch expects leverage to remain around the 3.0x-3.1x level in the intermediate term.

Fitch expects free cash flow (FCF) levels in 2014 and 2015 to be negative due to the continued high level of capital investment and weaker wireless performance.

The sale of noncore assets has mitigated the effect of negative FCF on USM and TDS. USM is in the process of selling the wireless towers located in the Chicago and St. Louis markets that were sold to Sprint (News - Alert). This follows the sale of certain wireless spectrum licenses in 2013 and 2014 for more than $400 million.

In relation to its total outstanding debt of $1.72 billion at Sept. 30, 2014, TDS has relatively high balances of cash and short-term investments, which amounted to $573 million and $40 million, respectively.

Per policy, the company's maturities are very long. The earliest notes at TDS are due in 2045 ($116 million) and at USM the earliest maturity is in 2033 ($532 million). At TDS, the $400 million, undrawn revolving credit facility matures in December 2017, and at USM, the $300 million undrawn revolving credit facility also matures in December 2017.

RATING SENSITIVITIES

Negative Rating Action: Longer term, Fitch believes TDS's ability to grow revenues and cash flows while competing effectively against much larger national operators is key to maintaining its 'BB+' IDR. In addition, if gross leverage--calculated including partial credit for material wireless partnership distributions in EBITDA--approaches 3.5x, a negative action could be contemplated.

Positive Rating Action: Fitch believes that competitive factors, current subscriber trends and the company's relative position in the wireless industry would not likely allow a positive rating action at this time.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Telecommunications - Rating Navigator Companion' (Nov. 17, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Telecommunications: Ratings Navigator Companion

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809869

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