Crown Castle International, one of the largest wireless tower operators in the U.S., is tapping the securitization market for financing for the first time in three years.

It's issuing a total of $1 billion in five-year and 10-year notes (the size of the individual tranches has yet to be determined) through its master trust, which holds a first-priority interest in the equity of eight Crown Castle subsidiaries that own, lease, sublease or manage 10,888 wireless towers that are more than 96% leased to the Big Four U.S. carriers.

Proceeds from Crown Castle Towers LLC Series 2018-1 and 2018-2 will be used to pay off the $1 billion balance of bonds issued from the trust in 2010. The new bonds will rank pari passu, or on equal footing, in payment priority to $1 billion of bonds issued in 2015 that are the only other outstanding obligations of the master trust.

For the first time, Crown Castle is also taking on skin in the game, holding onto an unrated $52.7 million tranche of notes, in order to comply with risk retention rules that took effect at the end of 2016.

Morgan Stanley is the structuring agent and underwriter for the transaction.

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The new bonds carry a preliminary single-A rating from Fitch Ratings, and an equivalent A2 from Moody’s Investors Service.

Crown Castle's use of equity interests, rather than a real property, as collateral is unusual, and results in a cap on credit ratings for the securities issued via the master trust. Rival cell tower operator American Tower, in contrast, carried triple-A ratings on its 2018 lease securitization with notes backed by mortgage loans on portfolios of thousands of towers.

But based on the $8.1 billion valuation of Crown Castle (which carries lower investment grade ratings from each agency), Moody’s calculates the combined loan-to-value (CLTV) ratio of 24.6% on the 2018 securities – providing a “substantial cushion to help mitigate concerns surrounding the lack of mortgages in the transaction,” Moody’s report stated.

With an average of 2.6 tenant leases per site, Crown Castle’s annual net cash flow is estimated at more than $768 million.

Another risk for wireless-tower ABS is long-term obsolescence threat to cellphone technology, although Moody’s notes “minimal risk” in today's business for wireless tower operators. No existing platform has yet emerged to displace tower-based communications (satellites transmissions are unreliable for indoor or inclement weather coverage) and operates derive long-term revenue streams from lengthy ground leases that telephony, broadcast and data carriers sign (an average of 16 years remaining, with 3%-4.5% annual rent escalators).

The outlook is also strong for continued network expansion and investment by AT&T, Verizon, T-Mobile and Sprint.

Demand for tower leases is at a peak, thanks to the explosion of consumer demand for high-speed LTE data on cell phones, tablets and other mobile devices, the presale reports stated. Last year, AT&T and Verizon joined T-Mobile and Sprint in offering unlimited data offerings to consumers, increasing 4G data network traffic that drives more demand for tower bandwidth and new construction of towers.

Tower operators like Crown Castle are also benefiting from AT&T’s build-out of a nationwide first-responders network (FirstNet) beginning this year, as well as forthcoming 5G network build-outs by carriers beginning in 2019.

Some revenue streams may diminish soon, however. Both agencies cited a potential for lost revenue from the announced Sprint-T-Mobile merger by 2019 (pending regulatory approval). Both carriers account for 33.3% of revenue of the pool’s towers (20.3% for T-Mobile, 13% for Sprint).

Fitch estimates that 17.5% of the run-rate revenue of the leases in the pool involve towers where both carriers are located (each tower has an average of 2.6 tenants), which might result in up to a 9.3% reduction in annual net cash if the merged carriers consolidate operations at tower sites.

Fitch said there is also the potential for $14.2 million in revenue reduction based on tenant churn from both T-Mobile and Sprint on factors outside of the proposed merger.

T-Mobile is retiring leases on sites that have overlapping coverage with its 2013 merger partner MetroPCS Communications (formerly owned by Deutsche Telekom), while Sprint has an ongoing reconfiguration of its national LTE network that involves letting leases expire on its older iDEN network technology.

Crown Castle International Corp. operates 40,000 towers in the U.S. and Puerto Rico, with nearly 69% of the towers located in the top 100 geographic wireless market segments designated by the Federal Communications Commission.

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