Fitch Affirms American Tower's IDR at 'BBB'; Outlook Revised to Stable
OREANDA-NEWS. Fitch Ratings has affirmed American Tower Corporation's (AMT) 'BBB' long-term Issuer Default Rating (IDR) and 'BBB' ratings on its senior unsecured notes and credit facilities. The Rating Outlook has been revised to Stable from Negative.
KEY RATING DRIVERS
Fitch revised the Outlook to Stable from Negative as AMT is on track to meet our expectations to return to net leverage of 5x or below within a 12-24-month period, as stated in Fitch's February 2015 Rating Action Commentary, to warrant a Stable Outlook. Fitch expects AMT's net leverage to be approximately 5.1x (pro forma for current 2016 acquisitions) and 4.9x at the end of 2016 and 2017, respectively. In February 2015, the Outlook had been revised to Negative when AMT announced it would be acquiring rights to certain towers, and some outright, from Verizon Communications Inc. (Verizon) in a transaction totalling approximately $5 billion. The Verizon transaction, combined with other acquisitions in 2015, elevated leverage.
Since September 2013, the company has been on the delevering path on an organic basis, but has continued to be acquisitive. To support delevering while making acquisitions, in February 2015 the company issued on a net basis $1.34 billion of mandatory convertible preferred and $2.44 billion (net) of common stock to fund acquisitions, including the Verizon transaction. In May 2014 the company issued $583 million (net) of mandatory convertible preferred stock (both mandatory convertible preferred stock issues are given 100% equity credit). Stronger than expected organic growth, as well as acquisition-related EBITDA, and debt repayments have also enabled the company to remain on its delevering path.
AMT's ratings are supported by the financial flexibility provided by its strong free cash flow (FCF; cash provided by operating activities less capital spending and dividends) and its high EBITDA margin, which has been consistently above 60% in recent years. The tower business model translates into strong, sustainable operating performance and FCF growth, aided by the company's significant scale and the favorable demand characteristics for wireless services (particularly data).
AMT is expected to continue to post strong FCF, generate mid- to high-single-digit organic core revenue growth and expand organic margins. Tower revenues are predictable, and growth is provided by contractual escalators embodied in long-term lease contracts and there are strong prospects for additional business. The tower industry is benefiting from wireless carriers heavily investing in fourth generation (4G) networks to meet rapidly growing demand for mobile broadband services.
In the second quarter of 2016, AMT is expected to close its acquisition of a 51% stake in Viom Networks Limited (Viom), a tower operator in India, for approximately $1.2 billion in cash plus assumed debt. At some point in the future, AMT will contribute its existing tower portfolio in India to Viom, which Fitch expects will increase its stake in Viom to above 60%. Fitch believes that growth in both EBITDA and FCF will allow AMT to fund the acquisition with debt without varying from its year-end leverage path.
--Consolidated revenue grows to just over $5.7 billion, based on expectations for property revenue to be at the mid-point of company guidance of $5.61 billion. In addition, Fitch has incorporated approximately 3/4 of a year of revenue from the Viom acquisition and one-half of the year-one property revenue from the Tanzania acquisition in 2016. In 2017, revenue grows just over 7% based on the full-year effects of the Viom and Tanzania acquisitions. Thereafter revenue grows in the 4%-5% range due to contractual escalators and new-business growth.
--EBITDA margins decline slightly in 2016 due to the lower margins associated with acquired properties.
--Capital spending of approximately $750 million in 2016, which increases moderately through 2018, before declining slightly in 2019.
--Cash taxes remain modest, at less than $100 million in 2016 and increase modestly thereafter. There was a one-time cash tax charge in 2015 of $93 million related to Global Tower Partners (GTP) taken pursuant to a tax election, as GTP no longer operates as a separate REIT for state and federal tax purposes.
--Moderate stock repurchases as net leverage under 5x is reached, with further deleveraging arising from EBITDA growth (rather than debt repayment).
Positive: At the current 'BBB' level, Fitch does not currently anticipate near-term developments that could likely lead to an upgrade of the rating at this time.
A negative rating action could occur if:
--Operating performance falls short of expectations of at least mid-single-digit organic growth combined with margin pressure;
--A significant transaction, or share repurchases, results in expectations for net leverage sustained above 5x for longer than a 18-24 month period.
In Fitch's opinion, AMT has a strong liquidity position supported by its FCF, cash on hand, and availability on its revolving credit facilities. Operationally, cash flow generation should remain strong. For 2015, FCF was approximately $666 million. As of Dec. 31, 2015, cash on hand was approximately $321 million, and unused revolver capacity was approximately $2.7 billion on a pro forma basis. Of the cash balance, approximately $224 million was held by foreign subsidiaries.
AMT has two revolving credit facilities (RCFs): a $2 billion facility due in January 2021 and a $2.75 billion multi-currency RCF due in June 2019. The maturity dates for both credit facilities were extended by one additional year in October 2015. The principal financial covenant limits total debt/adjusted EBITDA (as defined in the agreements) to no more than 6.0x beginning in 2016. The covenants limit senior secured debt/adjusted EBITDA to 3.0x for the company and its subsidiaries. If debt ratings are below a specified level at the end of any fiscal quarter, the ratio of adjusted EBITDA to interest expense must be no less than 2.5x for as long as the ratings are below the specified level.
Debt maturities during 2016 and 2017 are nominal.
FULL LIST OF RATING ACTIONS
Fitch affirms AMT as follows:
--Long-term IDR 'BBB';
--Senior unsecured credit facilities 'BBB';
--Senior unsecured notes 'BBB'.
The Rating Outlook is Stable.