Moody’s Upgrades American Tower

Moody’s Investor Services (MCO - Analyst Report) has upgraded the rating of American Tower Corp’s (AMT - Analyst Report) senior unsecured debt. So far, this paper has been given a “Ba1” rating by Moody’s which implies a junk corporate rating and probability of default rating.

Now Moody’s has raised its rating to “Baa3,” implying its lowest investment-grade rating. Major reasons for this debt rating upgrade were the company’s strong operating performance, increased cash flow and reduced debt over the past two years.

American Tower accounts for most of its revenue from long-term (typically 5-10 year) tower leases with major wireless carriers. In addition, the company provides on-site maintenance and servicing of antennas, amplifiers and base-station equipment as it relates to leasing. This generates a strong long-term lease up-cycle.

The revenue generated from leasing and management of such networks is impressive, and over 95% is recurring in nature. Yearly revenue increased 9.4% in fiscal 2008 compared to the previous year. In the first half of 2009, total revenue was $832 million, up 7.2% compared to the prior-year period.

Mobile subscriber growth has significantly expanded the wireless tower industry. We believe, future financials are likely to be propelled by strong demand for wireless voice, broadband wireless data and video networks which require more tower space. Deployments of 3G and emerging 4G networks will also create impressive demand for tower leasing.

American Tower maintains one of the strongest EBITDA margins in the industry. EBITDA margin for the most recent quarter was 68%, well above its peers Crown Castle International (CCI - Analyst Report) and SBA Communications Corp (SBAC - Snapshot Report).

During the first half of 2009, American Tower generated $295 million of free cash flow (cash flow less capital expenditure) compared to $262 million in the prior-year period. The company enjoys stable operating costs. With the tower industry moving forward, operating cash flow is likely to accelerate. As of now, the company has more than $9 billion worth of non-cancelable lease backlog. At the current revenue run-rate, this constitutes approximately 6 years of lease backlog.

In addition, American Tower is quickly expanding its business operations in various emerging markets. Besides Brazil and Mexico, it has taken a major initiative to expand operations in India. Geographic expansion increases the total number of American Tower controlled wireless tower sights to over 26,000. This will generate a sustainable business in the long-run.