CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded the Issuer Default Ratings (IDR) of Crown Castle International Corp. (Crown) and its subsidiaries to 'BBB-' from 'BB'. In addition, Fitch has upgraded the long-term debt ratings of Crown and its subsidiaries as listed at the end of this release. The Outlook is Stable, resolving the previous Positive Outlook.
KEY RATING DRIVERS
Crown's ratings reflect the strong recurring cash flows generated from its leasing operations, the robust EBITDA margins and the scale of its tower portfolio. A focus on the U.S. market reduces operating risk. These factors lend considerable stability to cash flows and lead to a lower business risk profile than most typical corporate credits.
Delevering Progress: Crown has made progress on delevering following two major acquisitions of towers, or rights to towers, since the end of 2012. These transactions include the $2.5 billion T-Mobile transaction in 2012, which was largely debt financed, and the $4.8 billion AT&T Inc. transaction in 2013, which was primarily financed with equity. Fitch expects Crown's 2016 gross leverage to reach 5.2x on a run-rate basis at the end of the year, which is within Fitch's expectations for leverage for a 'BBB-' rating for a tower company with Crown's business and financial risk profile.
Higher Distributions: In December 2014, Crown began paying out a higher proportion of cash flow to its shareholders as it increased its distribution to $3.28 per share, or approximately $1.1 billion annually, from $1.40 per share, or approximately $470 million annually. The payout represents an acceleration of the level of payout relative to previous expectations, but slows future distribution growth. In addition, the change reduces the rate at which net operating loss carryforwards are used to manage required real estate investment trust (REIT) distributions.
Portfolio Expansion: In December 2013, Crown acquired exclusive rights to lease and operate towers from AT&T, Inc. for $4.83 billion. The rights are for a weighted average lease term of approximately 28 years, and Crown has the option to purchase the towers at the end of the respective lease term for aggregate payments of approximately $4.2 billion. The leased towers, plus a small number acquired outright, comprise approximately 24% of Crown's domestic towers.
Equity Financing: Approximately $3.95 billion of the AT&T transaction was funded by proceeds from October 2013 common and preferred equity offerings, with the remainder funded by cash on hand and revolver borrowings (later partly repaid by incremental term loans totalling $700 million).
Wireless Broadband Growth: A key factor in future revenue and cash flow growth for Crown and its industry peers is the growth in wireless network capacity needed to meet demand for mobile broadband services. Growth in 4G data services will drive amendment activity and new lease-up revenues from the major operators, leading to at least mid-single-digit growth prospects for the next couple of years. Crown has also deployed distributed antenna systems, which should allow it to capture additional share in the small-cell infrastructure required for scaling 4G networks.
Sunesys Acquisition: Crown will acquire Sunesys (a wholly owned subsidiary of Quanta Services, Inc.), a fiber services provider that owns or has rights to nearly 10,000 miles of fiber in major metropolitan areas, for $1 billion in a transaction expected to close by the end of the year. Strategically, the acquisition complements Crown's rapidly growing small-cell network business, which Fitch believes is a positive. Crown will fund the transaction in a leverage-neutral manner through the sale of its Australian subsidiary.
Australian Subsidiary: Crown Castle sold its 77.6% interest in its Australian subsidiary (CCAL) in May 2015 to a consortium of investors led by Macquarie Infrastructure and Real Assets for approximately $1.6 billion. After accounting for its ownership interest, the repayment of intercompany debt and transaction costs, Crown realized about $1.3 billion in net proceeds and disclosed that the primary use of cash would be to finance the Sunesys transaction. The sale was prompted by the receipt of unsolicited offers. CCAL was expected to contribute approximately $100 million to 2015 adjusted EBITDA.
Maturity Profile: Crown's maturity profile is manageable, with legal maturities for 2015 of $83 million and 2016 of $125 million, respectively. In May 2015, the company issued $1 billion of securitized tower revenue notes and used part of the proceeds for anticipated repayments of previously issued $250 million of tower revenue notes. The remainder was used for the repayment of other debt.
REIT Conversion: Crown converted to a REIT for tax purposes on Jan. 1, 2014. The company was not required to make an accumulated earnings and profits distribution in order to convert to a REIT. The company's total cash distribution in 2015 will approximate $1.1 billion. Fitch believes the company will have flexibility to manage its leverage as a REIT on a business as usual basis, since the contractual revenues with escalators provide for natural delevering over time.
KEY ASSUMPTIONS
--Fitch assumes organic site rental revenue growth will be in the low single digits (on a GAAP basis) in 2015, with potential improvements resulting from lower churn in the future. Over the next two to three years, EBITDA margins will remain relatively stable in the mid- to high-50% range.
--Fitch anticipates moderate deleveraging will produce gross debt/EBITDA (last 12-months EBITDA) in the range of 5.2x to 5.4x (as calculated by Fitch) at the end of 2016.
RATING SENSITIVITIES
Positive Rating Action: An upgrade is not likely within a rating horizon extending to the end of 2016.
Negative Rating Action: Developments potentially leading to a negative rating action include an increase in leverage above 5.5x for a protracted period of time due to an acquisition funded mostly by debt, or a change in financial policy targeting higher leverage.
LIQUIDITY
Strong Liquidity: Crown has meaningful cash generation, balance sheet cash, revolving credit facility availability and a favorable maturity schedule relative to available liquidity. Cash, excluding restricted cash, was $240 million as of March 31, 2015. For the LTM ended March 31, 2015, FCF was approximately $98 million. Capital expenditures were $842 million on capital expenditures during this period, of which approximately $90 million were sustaining capital expenditures, with the balance discretionary in nature.
CCOC had drawn $860 million on its $2.23 billion senior secured RCF as of March 31, 2014. The RCF matures in November 2018. The financial covenants within the credit agreement include a total net leverage ratio of 5.5x, and consolidated interest coverage of 2.5x.
Debt Maturities: Crown's maturity profile is manageable, with no significant legal maturities for 2015 or 2016. In 2015, anticipated repayments for securitized debt are expected under the terms of $250 million of tower revenue notes and WCP securitized notes with a current face value of $259 million.
FULL LIST OF RATING ACTIONS
Crown Castle International Corp. (CCIC)
--IDR upgraded to 'BBB-' from 'BB';
--Senior unsecured debt upgraded to 'BBB-' from 'BB-/RR5'.
Crown Castle Operating Company (CCOC)
--IDR upgraded to 'BBB-' from 'BB';
--Senior secured credit facility upgraded to 'BBB' from 'BB+/RR2'.
CC Holdings GS V LLC (GS V)
--IDR upgraded to 'BBB' from 'BB';
--Senior secured notes upgraded to 'BBB' from 'BBB-/RR1'.
The Rating Outlook has been revised to Stable from Positive.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987325
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987325
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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