The following is a press release from Fitch Ratings:
Fitch Ratings-Chicago-16 October 2018: Fitch Ratings has upgraded Crown Castle International Corp’s (CCI) Long-Term Issuer Default Rating (IDR) and senior unsecured notes and credit facilities ratings to ‘BBB’ from ‘BBB-‘. The Rating Outlook is Stable. The upgrade is based on expectations that the company will maintain leverage around the 5x range going forward.
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 for Crown than for most typical corporate credits.
Leverage of Around 5x Expected: Fitch expects Crown’s 2018 gross leverage (absent Lightower transaction) to be at the lower end of 5x range. Crown has a track record of deleveraging via EBITDA growth following major acquisitions. These include two major acquisitions of towers, or rights to towers, since the end of 2012:the $2.5 billion T-Mobile transaction in 2012 and the $4.8 billion ATT Inc. transaction in 2013, which was primarily financed with equity. Crown also madethree major fiber acquisitions in 2017:FiberNet, Wilcon and Lightower. The company issued $850 million of common equity in early 2018 to reduce leverage.
Based on the company’s issuance of equity in early 2018 and itsgoal to maintain leverage around 5x through its small cell and fiber investment cycle, Fitch believes expected leverage is appropriate for a ‘BBB’ rated tower company with Crown’s business and financial risk profile. Fitch believes current levels of investment, driven by small-cell investments will provide for future EBITDA growth enabling the company to sustain leverage around 5x in 2018 and beyond.
Wireless Broadband Growth: A key factor in Crown’s future revenue and cash flow growth is the wireless industry’s need for increasing amounts of mobile broadband wireless network capacity. Growth in 4G LTE data services and opportunities in 5G are driving amendment activity and new lease-up revenues from the major operators, leading to mid-single-digit organic site rental revenue growth prospects for 2018. Crown is active in building small-cells and distributed antenna systems, which should allow it to capture additional share.
Consolidation Risk Manageable:. Fitch believes the merger of T-Mobile US and Sprint Corporation, if approved by regulators, will not have a material effect on CCI’s operations. As of the first quarter of 2018, on sites where both companies had separate leases, both T-Mobile’s and Sprint’s revenues each accounted for approximately 6% of consolidated site rental revenues. The average remaining non-cancellable current lease term on such sites was approximately five years for T-Mobile and seven years for Sprint. Revenue growth from continued lease activity and contractual escalators in the U.S. market would more than offset the relatively modest losses occurring over time due to the combination of the two carriers.
Lightower Acquisition: The acquisition closed during the fourth quarter of 2017 (4Q17), and materially strengthened Crown’s small cell business by doubling its fiber footprint to approximately 60,000 route miles of fiber. Following the acquisition, the company covers nearly all of the most populous U.S. markets.
The U.S. wireless communications tower industry is dominated by two major players, American Tower Corporation (AMT; BBB/Stable) and Crown Castle International Corp. (CCI; BBB /Stable). AMT has operated with lower financial leverage (but higher emerging market exposure), but Crown Castle’s equity offering in early 2018 in support of its financial policies has narrowed the leverage difference. A third public tower operator, SBA Communications (SBA) also has a somewhat sizable share of the market. Over the last couple of years the tower industry has consolidated significantly, given AMT’s acquisition of Global Tower Partners and Verizon Communications Inc.’s towers, CCI’s acquisition of ATT Inc.’s and T-Mobile USA Inc.’s towers, and SBA’s acquisition of TowerCo LLC and Mobilitie LLC. All three companies elected to become REITs and will be required to distribute substantial amounts of cash. SBA Communications operates with higher levels of leverage. Tower operating businesses have high operating leverage, which leads to consistent profitability and strong free cash flow. This is due in large part to the small incremental cost associated with adding tenants to a tower, especially when compared to the large incremental EBITDA margin growth that results from such additions. The tower industry employs a stable business model and experiences much lower business risk than many business models within the telecommunication segment which results from several factors including long-term contracts, a stable pricing model, predictable expenses, low technology risk and long-term growth opportunities.
Fitch’s Key Assumptions Within Our Rating Case for the Issuer
– Fitch assumes revenue growth will be in the low 20% range (on a GAAP basis) in 2018 owing to the acquisitions made over the course of 2017. Over the next two to three years, EBITDA margins will remain relatively stable in the mid-to-high-50% range;
– 2018 EBITDA of just under $3.1 billion, increasing in the mid- to high-single digits in 2019-2020;
– Discretionary capex is expected to be in the $1.5 billion to $1.6 billion range during the next few years, as the company focused on building out fiber and small cells.
– Crown Castle issued equity in early 2018 to fund part of its discretionary capex and Fitch assumes Crown Castle will issue equity to maintainleverage around 5x.
– Dividends are projected to grow in the 7% to 8% range.
– Gross leverage in 2018 will be in the low 5x range and be around 5x over the forecast period.
Developments That May, Individually or Collectively, Lead to Positive Rating Action
– Fitch does not currently anticipate an upgrade of the rating at this time given the specialized nature of Crown Castle’s REIT assets;
– An upgrade could be considered, without a revision to leverage targets, if the company demonstrates stronger access to contingent liquidity, characteristic of other REIT sectors.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
– If a significant transaction, heavy discretionary capex or share repurchases, results in expectations for net leverage sustained above 5.0x for longer than 18-24 months.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: Crown has meaningful cash generation, balance sheet cash, RCF availability and a favorable maturity schedule relative to available liquidity. Cash, excluding restricted cash, was $206 million as of June 30, 2018.
Liquidity is provided by an unsecured $4.25 billion RCF maturing in 2023, of which approx $3.9 billion was available at June 30, 2018. In June 2018, CCI amended its credit facility to increase commitments by $750 million to a total of $4.25 billion and extend the maturity from August 2022 to June 2023. The financial covenants within Crown’s 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.
CCI does show a decent setup pattern. We see reduced volatility while prices have been consolidating in the most recent period. There is a resistance zone just above the current price starting at $107.86. Right above this resistance zone may be a good entry point.
Disclosure: I am long CCI.