August 1, 2012 / 5:35 PM / 5 years ago

TEXT-S&P revises Crown Castle International outlook

Overview
     -- U.S. tower operator Crown Castle increased reported EBITDA by
about 12% for the 12 months ended June 30, 2012.
     -- Leverage is currently around 7x and we believe Crown Castle has the 
ability to maintain leverage at no higher than 7x on an ongoing basis.
     -- We are affirming our 'B+' corporate credit rating on the company.
     -- We are revising the rating outlook to positive from stable, indicating 
a one-third or greater probability of an upgrade over the next year. 

Rating Action
On Aug. 1, 2012, Standard & Poor's Ratings Services affirmed its ratings on 
Crown Castle International Corp., including the 'B+' corporate credit rating, 
and revised our outlook on the company to positive from stable. 

We affirmed our 'B+' rating on Crown Castle Operating Co. Inc.'s $3.1 billion 
of combined credit facilities, including a $1 billion revolving credit, a $1.6 
billion term loan B, and a $500 million term loan A. The '4' recovery rating 
on the debt remains unchanged and indicates prospects for average (30%-50%) 
recovery in the event of a payment default. 

We affirmed our 'BB' rating on the secured notes at subsidiaries CC Holdings 
GS V LLC and Crown Castle GS III Corp. The '1' recovery rating on the notes 
remains unchanged and indicates prospects for very high (90%-100%) recovery in 
a payment default. 

We affirmed our 'B-' rating on the unsecured debt at parent Crown Castle 
International Corp. The '6' recovery rating remains unchanged and indicates 
prospects for negligible (0-10%) recovery in a payment default.

Rationale
The outlook revision reflects our view that there is at least a one-third 
probability of an upgrade of the company to 'BB-' from 'B+' over the next 
year. Crown Castle has continued to increase EBITDA over the last 12 months 
due to additional tenants on its wireless towers and price increases in its 
existing contracts. This growth has enabled the company to achieve leverage of 
7x, despite a $1.5 billion increase in debt since the end of 2011 to fund the 
acquisitions of WCP and NextG. Our positive outlook reflects the fact that 
Crown has the ability, absent a materially sized, debt-funded acquisition, to 
maintain leverage no higher than 7x on an ongoing basis, which would support 
an upgrade.

The ratings on Crown Castle reflect the company's aggressive financial policy, 
given its historical use of debt and excess cash flow to fund large stock 
repurchases. As a result, adjusted leverage is high, at about 7x for the 12 
months ended June 30, 2012, including our adjustments to add the present value 
of operating leases to debt. We anticipate that the company will benefit from 
tower leasing revenue growth over the next year due to price increases in its 
contracts, and the addition of new tenants on its tower sites, which should 
contribute to an increase in EBITDA in the mid- to high-single-digit area for 
2012 and 2013. However, given the company's aggressive financial policy, we 
believe that it may use excess cash flow to repurchase stock, rather than 
repay debt, especially since it has no near-term maturities. 

Crown Castle is one of the largest independent tower operators in the U.S., 
with a total portfolio of approximately 24,000 towers, in addition to various 
distributed antennae systems. However, in our view, the "highly leveraged" 
financial risk profile overshadows the company's "strong" business risk 
profile.

The business generates cash flows that have a high degree of stability, given 
the long-term nature of the wireless carrier contracts and high renewal rates. 
In addition, there has been a trend toward longer term contracts in this 
business and Crown Castle's customers have little to no flexibility to 
terminate early without fully honoring the contract. Typical of the tower 
leasing industry, the high operating leverage of the business also contributes 
to extremely healthy tower gross profit and overall unadjusted EBITDA margins, 
which were 74.6% and 62.6%, respectively, for the second quarter of 2012. A 
high percentage of the business' EBITDA can translate into discretionary free 
cash flow, given very modest maintenance capital expenditures. However, we 
expect Crown Castle to use a significant amount of its discretionary cash 
flows to continue to repurchase its common stock.

Crown Castle benefits from continued subscriber growth in the wireless 
communications industry, which has expanded both in terms of absolute 
subscribers and per-subscriber minutes of use. These trends and the need for 
more coverage and capacity to accommodate demand have translated into 
additional tenants leasing space on existing towers, a trend known as 
colocation. Moreover, the major carriers have upgraded their networks to 
provide higher speed wireless data capabilities, which in many cases has 
required additional tower equipment. The regional carriers also have 
increasingly added to their coverage areas to offer plans competitive with the 
national players, which, in turn, have boosted tower leasing revenues.

Crown Castle also benefits from stable monthly cash flows from carriers with 
substantial financial resources, including Verizon Wireless and AT&T Mobility. 
These long-term contracts have very high renewal rates and average annual rent 
increases of 3%. Moreover, the towers have the capacity to support multiple 
tenants, providing additional upside to cash flows per tower, particularly 
because adding tenants to existing towers involves minimal incremental 
operating expense.

Liquidity
We consider Crown Castle's liquidity "adequate." Sources of liquidity include 
availability of $1 billion under the revolving credit facility, coupled with 
expectation that the company will generate about $730 million of cash from 
operations in 2012. We expect that these sources of liquidity will provide at 
least 1.2x coverage of uses. We also expect Crown Castle will continue to 
repurchase common stock, as well as incur capital expenditures for land 
purchases, tower improvements, and new tower builds. We expect the company 
will continue to have at least 15% minimum EBITDA cushion under its 6x total 
leverage covenant, which does not step down until March 2014.

Recovery analysis
For the complete recovery analysis, see the recovery report on Crown Castle, 
to be published shortly on RatingsDirect.

Outlook
The positive ratings outlook largely reflects the high degree of revenue 
visibility inherent in the wireless tower business model. An upgrade could 
occur if the company were able to demonstrate that it can maintain leverage of 
no higher than 7x on an ongoing basis, absent a materially sized, debt-funded 
acquisition. Even if the company were to pursue an acquisition that 
temporarily increased leverage to the mid-7x range, we could still raise the 
ratings if we expected subsequent growth to lead to leverage improvement below 
7x.

A revision in the outlook back to stable is likely if leverage rises above 8x, 
which could occur if the company were to buy a large tower portfolio, such as 
the T-Mobile USA assets, which, according to numerous press reports, are up 
for possible sale by Deutsche Telekom AG. Alternatively, if the company's 
financial policy were to become even more aggressive, including the adoption 
of a substantially larger share repurchase program or paying a special 
dividend of about $2.75 billion, either of which is debt-funded, such actions 
would likewise prompt a revision in the outlook back to stable. 

Related Criteria And Research
     -- U.S. Telecom And Cable Companies' Maturities Are Manageable, But 
Lower-Rated Issuers Face Some Liquidity Challenges, July 23, 2012
     -- U.S. Telecom And Cable Companies, Strongest To Weakest, July 13, 2012
     -- U.S. Telecom And Cable Ratings Should Be Stable Overall During Weak 
Economic Recovery, July 13, 2012
     -- A Matter of Policy: U.S. Telecom Companies Maintain High Dividend 
Payouts, But For How Long?, May 30, 2012
     -- A Matter of Policy: U.S. Cable And Satellite-TV Companies Ratchet Up 
Shareholder Payouts, May 16, 2012
     -- Top 10 Investor Questions: U.S. Telecom and Cable Industries, May 10, 
2012
     -- Assessing The Four-Notch Rating Gap Between The Two U.S. 
Direct-To-Home Satellite Video Operators, May 9, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

Ratings List

Crown Castle International Corp.
Ratings Affirmed; Outlook Action
                                        To                 From
Crown Castle International Corp.
 Corporate Credit Rating                B+/Positive/--     B+/Stable/--

Ratings Affirmed
Crown Castle International Corp.
 Senior Unsecured                       B-                 
   Recovery Rating                      6                  

CC Holdings GS V LLC
 Senior Secured
  Local Currency                        BB                 
  Recovery Rating                       1                  

Crown Castle GS III Corp.
 Senior Secured
  Local Currency                        BB                 
  Recovery Rating                       1                  

Crown Castle Operating Co.
 Senior Secured                         B+                 
   Recovery Rating                      4

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below