(The following statement was released by the rating agency) Overview
-- U.S. tower operator Crown Castle has agreed to acquire rights to about 7,200 T-Mobile USA towers for $2.4 billion in cash.
-- We expect leverage to increase to nearly 8x at the end of 2012, pro forma for the transaction, and decline modestly to the mid-7x area in 2013.
-- We are revising our outlook on the company to stable from positive since we no longer expect it to achieve leverage of 7x within our two-year rating horizon.
-- We are affirming all ratings on the company, including our 'B+' corporate credit rating;
-- Issue and recovery ratings for Crown and its related entities remain unchanged at present, but will be re-evaluated when the company outlines a definitive financing plan for the T-Mobile transaction.
Rating Action On Oct. 2, 2012, Standard & Poor's Ratings Services revised its outlook on Crown Castle International Corp.
to stable from positive as a result of the company's announced agreement to acquire rights to T-Mobile's 7,200 towers in a debt-financed transaction valued at about $2.4 billion. At the same time, we affirmed all of Crown's ratings, including the 'B+' corporate credit rating.
The outlook revision reflects our view that there is no longer a one-third probability of an upgrade given the additional debt associated with the acquisition. We now expect leverage, including our adjustments for operating leases, to be nearly 8x as of the end of 2012, pro forma for the EBITDA contribution from the T-Mobile towers. While we believe that the combination of contractual rent increases, additional tenant colocation revenues on its existing towers, and somewhat faster revenue growth on the T-Mobile towers will contribute to a low- to mid-teen percent increase in EBITDA in 2013, we don't expect leverage to drop to 7x or below before 2014 at the earliest. Our positive outlook had incorporated the possibility that Crown's leverage would improve to 7x or less within our two-year rating horizon, which we no longer believe is achievable.
The ratings on Crown reflect the company's aggressive financial policy, given its historical use of debt and excess cash flow to fund large stock repurchases. As a result, adjusted leverage is high, at about 7x for the 12 months ended June 30, 2012. We anticipate that the company will benefit from tower leasing revenue growth over the next year due to price increases in its contracts and the addition of new tenants on its tower sites, which should contribute to an increase in EBITDA in the mid- to high-single-digit area for 2012 and 2013. The T-Mobile towers, which have a lower tenancy per tower than Crown's own business, have somewhat higher growth potential, although our assumption for the addition of tenants on these towers is fairly conservative. Moreover, given the company's aggressive financial policy, we believe it may use excess cash flow to repurchase stock rather than repay debt, especially since it has no near-term maturities.
Crown is one of the largest independent tower operators in the U.S., with a total portfolio of approximately 24,000 towers, in addition to various distributed antennae systems. Pro forma for the T-Mobile transaction, the company will operate a portfolio of over 30,000 towers.
We view the business risk profile as "strong."The business generates cash flows with a high degree of stability, given the long-term nature of the wireless carrier contracts and high renewal rates. In addition, there has been a trend toward longer term contracts in this business and carriers have little to no flexibility to terminate early without fully honoring the contract. Typical of the tower leasing industry, the high operating leverage of the business also contributes to extremely healthy tower gross profit and overall unadjusted EBITDA margins, which were 74.6% and 62.6%, respectively, for the second quarter of 2012. A high percentage of the business' EBITDA can translate into discretionary free cash flow, given very modest maintenance capital expenditures. However, we expect Crown to use a significant amount of its discretionary cash flows to continue to repurchase its common stock.
Crown benefits from continued subscriber growth in the wireless communications industry, which has expanded both in terms of absolute subscribers and per-subscriber minutes of use. These trends and the need for more coverage and capacity to accommodate demand have translated into additional tenants leasing space on existing towers, a trend known as colocation. Moreover, the major carriers have upgraded their networks to provide higher speed wireless data capabilities, which in many cases, has required additional tower equipment. The regional carriers also have increasingly added to their coverage areas to offer plans competitive with the national players, which, in turn, have boosted tower leasing revenues.
Crown also benefits from stable monthly cash flows from carriers with substantial financial resources, including Verizon Wireless and AT&T Mobility. These long-term contracts have very high renewal rates and average annual rent increases of 3%. Moreover, the towers have the capacity to support multiple tenants, providing additional upside to cash flows per tower, particularly because adding tenants to existing towers involves minimal incremental operating expense.
We consider Crown's liquidity "adequate." Sources of liquidity include availability of $1 billion under the revolving credit facility, coupled with the expectation that the company will generate about $960 million of funds from operations in 2012. We note that the company has not yet identified a specific financing plan to fund the T-Mobile acquisition, although our "adequate" liquidity assessment assumes it will be able to access the capital markets for the transaction. We may revisit this assessment if the company delays a financing plan or has difficulty in accessing the market.
We expect that sources of liquidity will provide at least 1.2x coverage of uses. We also expect Crown will continue to repurchase common stock, as well as incur capital expenditures for land purchases, tower improvements, and new tower builds. The company is likely to maintain at least 15% minimum EBITDA cushion under its 6x total leverage covenant, which does not step down until March 2014.
Recovery analysis For the complete recovery analysis, seethe recovery report on Crown, published Aug. 2, 2012, on RatingsDirect.
The outlook is stable. As a result of Crown's acquisition of the leasing rights to the T-Mobile towers, we expect that its debt to EBITDA will be nearly 8x for 2012, pro forma for the T-Mobile transaction. We expect this leverage to decline to the mid-7x area by the end of 2013.
The rating could be raised if we came to expect a leverage reduction to 7x or lower on a sustained basis, which could occur if EBITDA increases at around a 13% rate in 2013 rather than the low- to mid-teen percent area we currently assume in our base-case scenario. Conversely, and less likely, in our view, we could lower the rating if Crown were to become more aggressive in its financial policy such that it used debt to repurchase stock for in excess of $5 billion, since this would increase leverage to the 10x area.
Related Criteria And Research
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-- U.S. Telecom And Cable Companies' Maturities Are Manageable, But Lower-Rated Issuers Face Some Liquidity Challenges, July 23, 2012
-- U.S. Telecom And Cable Companies, Strongest To Weakest, July 13, 2012
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-- Top 10 Investor Questions: U.S. Telecom and Cable Industries, May 10, 2012
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-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
Ratings Affirmed; Outlook Action
Crown Castle International Corp.
Corporate Credit Rating B+/Stable/-- B+/Positive/--
Ratings Affirmed; Recovery Ratings Unchanged
Crown Castle International Corp.
Senior Unsecured B- Recovery Rating 6 CC Holdings GS V LLC Crown Castle GS III Corp. Senior Secured BB Recovery Rating 1 Crown Castle Operating Co. Senior Secured B+ Recovery Rating 4
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at
. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)