Fitch Ratings has assigned a 'BBB-' rating to American Tower Corporation's (AMT) proposed offering of $500 million senior unsecured notes due 2023. Proceeds from the notes will be used to partially repay $1.257 billion of borrowings on the company's senior unsecured revolving credit facilities and for general corporate purposes. The company's Long-term Issuer Default Rating (IDR) is 'BBB-' and the Rating Outlook is Stable.
AMT borrowed $1.257 billion on its two revolving credit facilities in the fourth quarter of 2012 to fund acquisitions. In December, the company paid approximately $526 million to acquire 2,031 sites from Royal KPN N.V.'s German subsidiary and $68 million for smaller acquisitions in Mexico and Colombia. In the fourth quarter, American Tower paid $506.6 million to acquire 680 sites in the U.S. While increasing leverage initially, Fitch believes the acquisitions add scale and diversify the company's revenue stream in the longer-term.
AMT's ratings are supported by the financial flexibility provided by its strong free cash flow (FCF). The ratings are also supported by its high EBITDA margin, which was 64% for the last 12 months (LTM) ending Sept. 30, 2012. AMT also has significant operational scale provided by its large tower portfolio. This combined with favorable demand characteristics for wireless services (particularly data) translates into strong, sustainable operating performance and FCF growth.
AMT's predictable and growing revenue base is generated primarily from long-term lease contracts with national wireless operators, of which several are investment-grade. This leads to a low business risk profile. AMT, and the tower industry as a whole, are benefiting from wireless carriers expanding their fourth generation (4G) networks to supply rapidly growing demand for mobile broadband services. Similar trends are occurring internationally with wireless data services at a much earlier stage of development than in the US. As a result, Fitch expects these dynamics to more than offset the effects of recent and potential future wireless operator consolidation on AMT's results.
The rating also reflects AMT's commitment to a net leverage target in a range of 3.0x to 5.0x. AMT's gross leverage metric was 4.2x for the LTM ended Sept. 30, 2012. AMT's leverage metric reflects EBITDA from acquisitions from the date of closing.
At the end of 2012, Fitch estimates AMT's gross leverage ratio was in the 4.7x - 4.8x range, owing to the close of acquisitions in the fourth quarter. On a pro forma basis, leverage was slightly below the low-to-mid-4x level that Fitch believes may be a reasonable range for the rating category for AMT's business and financial risk profile.
The rating also takes into account AMT's real estate investment trust (REIT) status. Fitch believes AMT will retain significant flexibility to manage its leverage as a REIT even though it will be required to distribute required levels of REIT earnings to shareholders.
Risks reflected in AMT's ratings include the expansion of operations internationally and the potential for acquisitions. Fitch expects AMT's international revenue, about 30% of the total (24% if certain pass-through revenues are excluded) in third quarter-2012, to continue to grow over the longer term. The effect of future acquisitions on AMT's credit profile will depend on the size, timing and financing of such acquisitions. Fitch believes that AMT would consider the use of equity to maintain a relatively stable credit profile in the event it entered into an agreement to acquire a sizeable tower portfolio.
Expected U.S. wireless consolidation is not expected to have a material effect on AMT's operations. AMT has disclosed that where Sprint and Clearwire (Sprint's acquisition of Clearwire is pending approval) are located on the same sites, the revenue generated is approximately 1% of total revenues. Similarly, the overlapping sites in the pending T-Mobile USA and MetroPCS combination generate approximately 1% of revenues. Revenue growth from continued lease activity and contractual escalators in the U.S market will more than offset the relatively modest losses that may occur over time due to consolidation.
Fitch views AMT's liquidity position as strong. This is due chiefly to its balance sheet cash, meaningful FCF generation and favorable maturity schedule relative to available liquidity. Cash, excluding restricted cash, was $382 million as of Sept. 30, 2012.
For the LTM ending Sept. 30, 2012, FCF (cash provided by operating activities less capital spending and dividends) was approximately $792 million. This compares favorably to FCF for 2011 of approximately $505 million. In 2012, Fitch estimates AMT's free cash flow was in the $525 million to $575 million range based on a distribution of approximately $352 million.
As of Sept. 30, 2012, and net of letters of credit, AMT had a total of $997 million available on its $1 billion senior unsecured RCF maturing in 2017 and $993 million available on its senior unsecured RCF maturing in 2016. The principal financial covenants limit total debt to adjusted EBITDA (as defined in the agreements) to 6.0x and senior secured debt to adjusted EBITDA to 3.0x. The ratio of adjusted EBITDA expense must be no less than 2.5x. The next material maturity consists of the $1.75 billion commercial mortgage pass-through certificates which mature in 2014.
WHAT COULD TRIGGER A RATING ACTION
A positive rating action could occur if:
--The pace of acquisitions was to slow;
--The company operated on a consistent basis at the low end of its targeted leverage range.
A negative rating action could occur if:
--AMT operates at the high end of its target range for an extended period of time;
--There is a change in financial policy targeting higher leverage;
--The company enters into a material leveraging transaction and leverage is not reduced to the low to mid 4x range within a 12 to 18 month period.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Telecom Companies
Criteria for Rating U.S. Equity REITs and REOCs
John C. Culver, CFA, +1-312-368-3216
Fitch, Inc., 70 W. Madison Street
Chicago, IL 60602
Bill Densmore, +1-312-368-3125
Mike Weaver, +1-312-368-3156
Brian Bertsch, New York, +1-212-908-0549
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