CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) and senior unsecured debt ratings for Crown Castle International Corp. (Crown) at 'BBB-'. The Rating Outlook remains Stable. A full list of ratings actions follows at the end of this release.
KEY RATING DRIVERS
Strong Recurring Cash Flows: Crown's ratings reflect the strong recurring cash flows generated from its leasing operations, robust EBITDA margins and the scale of its tower portfolio. In addition, a focus on the U.S. market reduces operating risk. The tower business model provides considerable stability to operating performance and free cash flow (FCF) growth. These characteristics have led to a lower business risk profile than most typical corporate credits.
Deleveraging Progress: Crown has deleveraged via EBITDA growth 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 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 approximate 5.8x at the end of the year, which is slightly above our expectations for leverage for a 'BBB-' rated tower company with Crown's business and financial risk profile. However, Fitch believes current levels of investment, driven by small-cell investments, will provide for future EBITDA growth, driving leverage down.
Wireless Broadband Growth: A key factor in Crown's future revenue and cash flow growth is the relentless rise in the need for mobile broadband wireless network capacity. Growth in 4G LTE data services is driving amendment activity and new lease-up revenues from the major operators, leading to mid-single-digit organic revenue growth prospects for 2016. Crown is active in building small cells and distributed antenna systems, which should allow it to capture additional share. To boost its small-cell capabilities, Crown acquired Sunesys in 2015.
Consolidation Risk Manageable: Fitch believes that if consolidation in the U.S. wireless market were to occur, there would not be a material effect on Crown's operations. While relatively modest losses would occur, revenue growth from continued lease activity and contractual escalators would more than offset such losses over time.
Tower Development Corporation Acquisition: In April 2016, Crown acquired Tower Development Corporation (TDC) for $461 million. TDC has approximately 330 towers and there are approximately two tenants per tower. The transaction was financed with cash on hand, drawings on the revolver and cash from the issuance of approximately $300 million of equity under an at-the-market (ATM) program. In the first year, the transaction is expected to contribute $25 million to $27 million to site-rental gross margin and is relatively leverage neutral.
Sunesys Acquisition: In August 2015, Crown acquired Sunesys from Quanta Services, Inc., for $1 billion. Sunesys owned or had rights to nearly 10,000 miles of fiber in major metropolitan areas. Strategically, the acquisition complements Crown's rapidly growing small-cell network business, which Fitch believes is a positive. Crown funded the transaction in a leverage-neutral manner through the sale of its Australian subsidiary in May 2015 for net proceeds of approximately $1.1 billion at the time of close.
--Fitch assumes revenue growth will be in the mid-single digits (on a GAAP basis) in 2016, 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 delevering will produce gross debt/EBITDA (last 12 months [LTM] EBITDA) just over 5.8x and 5.7x at the end of 2016 and 2017, respectively.
Positive Rating Action: A commitment to leverage of less than 4.7x to 4.8x could lead to a positive rating action.
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 that targets higher leverage.
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 $202 million as of June 30, 2016.
In January 2016, Crown entered into a new $5.5 billion senior unsecured credit facility, and used the new facility, plus cash on hand, to repay the previous senior secured facility at its subsidiary Crown Castle Operating Company. The new facility consisted of a $2.5 billion revolver maturing in January 2021, a $1 billion 364-day facility maturing in January 2017 (repaid in February 2016) and a $2 billion senior unsecured term loan A maturing in January 2021.
In February 2016, Crown issued $1.5 billion of senior unsecured notes and used the proceeds to repay the 364-day facility, which was then terminated, and to repay $500 million of borrowings on the new revolver. The financial covenants within the new unsecured credit agreement include a total net leverage ratio of 6.5x (not to exceed 7x for up to three quarters following a qualified acquisition), a senior secured leverage ratio of 3.5x (on a gross basis) and, if rated below investment grade by two of three rating agencies, consolidated interest coverage of 2.5x.
Crown's FCF is expected to be negative in 2016 and is affected by REIT required distributions as well as the use of cash for discretionary capex. As a REIT, Crown is required to distribute at least 90% of its REIT taxable income, after the use of any net operating losses. In 2015, FCF was negative, approximating $273 million (per Fitch's calculation, which includes net cash provided by operating activities of discontinued operations). Capex was $909 million in 2015, of which approximately $76 million was for sustaining capex, with the balance discretionary in nature.
Maturity Profile: Following the August 2016 refinancing of the $500 million of 2.381% senior secured notes at CC Holdings GS V LLC, Crown's maturity profile over 2016 to 2019 has no significant maturities.
Fitch has affirmed the following ratings with a Stable Outlook:
Crown Castle International Corp. (CCIC)
--Long-Term IDR at 'BBB-';
--Senior unsecured debt at 'BBB-'.
CC Holdings GS V LLC (GS V)
--Long-Term IDR at 'BBB-';
--Senior secured notes at 'BBB'.
The following has been withdrawn as the debt at this subsidiary has been repaid.
Crown Castle Operating Company (CCOC)
--Long-Term IDR at 'BBB-'.
Additional information is available on www.fitchratings.com.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Historical and projected mandatory convertible preferred stock is given 100% equity credit.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)
Dodd-Frank Rating Information Disclosure Form