Crown Castle to Issue Senior Notes

Crown Castle International (CCI - Analyst Report), one of the largest independent tower companies, has decided to issue $1.65 billion of senior notes, due in 2023, to finance the recent $2.4 billion deal with T-Mobile USA. The long-term notes will carry an interest rate of 5.25% and will be issued at 100% of the face value. The company plans to accumulate $1.631 billion of fund after allowing issuance discounts, commissions and offering expenses.

Recently, Crown Castle and T-Mobile USA, a unit of Deutsche Telecom AG entered into a definitive agreement through which Crown Castle will acquire the exclusive right to lease and operate approximately 7,200 wireless towers of T-Mobile USA for a weighted average term of nearly 28 years. The deal is expected to be closed in the fourth quarter of 2012, subject to customary regulatory approval and will make it the largest tower company in U.S. surpassing American Tower Corporation (AMT).

The company plans to use the proceeds collected through the note offering coupled with the existing cash and funds from its existing revolving credit facility to finance the deal. Nevertheless, if the T-mobile deal lapses or ends up with Crown Castle paying less for acquiring lesser number of towers, then the Houston-Texas based company expects to use the remaining net proceeds for general corporate purpose or repayment of other debts.

CrownCastlehas a substantially leveraged balance sheet. At the end of the second quarter of 2012, the company had approximately $8.34 billion (around $29.4 per share) of net debt (total debt less cash & cash equivalents), while it had approximately $96.2 million of cash and marketable securities on its balance sheet at the end of the second quarter of 2012. The new offering will further expand its debt position approximately to $10 billion thus pressurizing its leverage ratio.

Recently, Rating agency Standard and Poor’s (S&P) lowered its outlook on Crown Castle to B+/Stable from B+/Positive on the back of expected increase in leverage ratio from the T-Mobile transaction. Now S&P has assigned a B- issue level along with ‘6’ recovery ratings on the notes, which indicate that in case of default there is a negligible chance of recovering the principal. Moody’s Investor Service also assigned a B1 rating for the new bonds, citing high degree of credit risk. Negative sentiments of the rating agency forced the company to issue the notes at almost 3.63% higher than similar maturity government bonds.

Although Crown Castle expects to garner about $125-$130 million in adjusted fund from operations (AFFO), before financing cost, in 2013 from the T-Mobile deal, we believe, very high level of indebtedness may reduce its ability to generate sufficient amount of cash to meet its debt obligations on time.

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.