Diamond Communications, a company founded in 2006 by former executives of AAT Communications, is making its first call on the securitization market with $160 million of bonds backed by cell tower leases.
The deal, Diamond Issuer, is structured as a master trust that may issue additional tranches and classes of notes. It is collateralized by 490 cellular sites being leased to 674 tenant leases. The portfolio has annualized run rate revenue (ARRR) of approximately $19.1 million and annualized run rate net cash flow (ARRNCF) of approximately $15.9 million.
It’s also the first deal to hit the market since T-Mobile and Sprint abandoned negotiations to merge, which could have resulted in the combined entity not renewing redundant leases. The challenges that these two carriers faced in combining suggests that further consolidation among the top four carriers is unlikely, according to Kroll Bond Rating Agency.
Approximately 33.9% of ARRR is derived from Sprint (16.3%) and T-Mobile (17.6%). AT&T Wireless and Verizon Wireless account for 31.9% and 28.3% of ARRR, respectively. While Kroll considers all four to be high quality, creditworthy tenants, the deal’s concentrated exposure means that a deterioration in the credit quality of any one could negatively impact performance.
Diamond Issuer also has risk that is somewhat unusual, according to Kroll: It owns a number of cell tower sites through joint ventures with affiliates of First Energy, a utility. These sites represent roughly 64% of the annualized run rate net cash flow of the total collateral. Diamond Communications is the minority partner in the venture, but it has the right of first refusal should First Energy decide to sell its stakes.
If any of the First Energy affiliates were to default, Diamond’s ability to continue operating at these sites may be challenged, though Kroll views this risk as remote.
The tenant leases are also exposed to near-term rollover risk. The weighted average remaining term based on ARRR, not including renewals, is approximately 4.6 years and, in some cases, the leases contain voluntary termination options. However, historic renewal rates for the portfolio and the telecommunications industry have averaged approximately 99%. The weighted average remaining term based on ARRR, including renewals, is approximately 21.8 years.
Three tranches of notes with preliminary ratings from Kroll will be issued in the deal: $118.4 million of Class A notes are rated A, $12.6 million of Class B notes are rated BBB and $29 million of Class C notes are rated BB. All of the notes have a final payment date of December 2047.
On the closing date, $20 million, or 12.5% of the total proceeds, are expected to be deposited into a separate account to be used to acquire additional cellular sites or tenant leases.
Diamond is one of the largest privately owned tower and wireless infrastructure companies in the United States and it owns, manages and operates wireless communications infrastructure across the country, with a concentration in the Northeast, mid-Atlantic and Ohio. Its headquarters is in Short Hills, New Jersey.
The company is operated and managed by a team that includes officers and senior managers who previously held senior management positions at AAT Communications, which was acquired by SBA that year.