[January 23, 2015]

Fitch Rates United States Cellular's Sr Unsecured Credit Facility 'BB+'; Outlook Stable

Fitch Ratings has assigned a 'BB+' rating to United States Cellular Corp.'s (USM) senior unsecured, seven-year term loan for up to $225 million. Proceeds will be used for general corporate purposes, including capital expenditures and potential spectrum purchases.

USM's Issuer Default Rating (IDR) is 'BB+' with a Stable Outlook. USM's ratings consider the consolidated ratings at its parent Telephone and Data Systems, Inc. (TDS), which also has an IDR of 'BB+' and a Stable Rating Outlook.

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 (2H'14), 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 4Q'13, 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 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 3x-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 spectrum auctions, the sale of its non-core tower business and continued wireless network investment, Fitch expects leverage to remain around the 3x-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 s 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 matures in December 2017 as well.

RATING SENSITIVITIES

Negative Rating Action: Longer term, Fitch believes TDS's and USM's ability to grow revenues and cash flows while competing effectively against much larger national operators is key to maintaining their 'BB+' IDRs. 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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=977815

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