Rating agency Standard and Poor’s (S&P) lowered its outlook on Crown Castle International – one of the largest independent tower companies – by one notch. The downgrade from positive to stable was based on the company’s recent agreement to acquire the rights of T-Mobile’s 7200 wireless towers for $2.4 billion.
S&P has affirmed Crown Castle’s corporate credit rating outlook to B+/Stable from B+/Positive as the rating firm believes that the T-Mobile transaction would increase its leverage by eight times to that of 2012 EBITDA (Earnings before interest, tax, depreciation and amortization). However, S&P expects Crown Castle’s debt to EBITDA ratio to be 7.5 by the end of 2013.
S&P has confirmed that it could raise Crown Castle’s rating if it can substantially reduce its debt-to-EBITDA ratio to 7 or lower, which will depend on the company’s ability to generate an EBITDA margin of 13% and above. On the flip side, if the company continues with its aggressive share repurchase program instead of repaying its debt, the rating agency could lower its rating.
CrownCastlewill benefit from the T-Mobiles tower deal as it will significantly increase its tower leasing revenue with the addition of new tenants and increase in contractual rent, which in turn will increase the potential for EBITDA growth. The longer term contracts, high contract renewal fees and lower carrier flexibility to terminate contracts provide tower industry with solid revenue visibility. Additionally, the very low maintenance capital expenditure of tower industries will help the company generate high cash flow.
The unprecedented surge in data demand has spurred wireless carriers like Verizon Communication Inc. and AT&T Inc. towards network coverage expansion. We believe the data surge will be profitable for Crown Castle as additional tenants will demand space on their existing towers.
Furthermore, the company’s $1 billion revolving credit facility coupled with good cash flow generation will enhance its ability to access the capital markets. Although the company has not declared a specific financial plan to acquire the T-mobile assets, higher usage of debt could increase its leverage ratio, which will lead to further rating revisions.
We are maintaining our long-term Outperform recommendation on Crown Castle International Inc. However, the company currently retains a Zacks #3 Rank, implying a short-term Hold rating.