With the coronavirus pandemic and several other factors pointing to increasing consumer demand for wireless data access and content, Diamond Communications’ current securitization includes a sizable acquisition account that may introduce new assets to the securitization pool.
The $39 million acquisition account, representing 55.6% of the offering, can be used during a specific period of time to fund the acquisition of new cellular sites and additional tenant leases, or purchase real property interests underlying specific cellular sites.
KBRA’s pre-sale report notes that the most effective long-term network solution to rising data traffic is to increase networks’ physical capacity, either by introducing new technologies into the existing structure or adding additional capacity within the existing technology framework.
“Either method typically gives Diamond an opportunity to re-negotiate tenant lease terms with tenants looking to add equipment to existing sites, which should lead to higher base rent, or densifying their networks by adding equipment to sites on which they do not have a presence,” KBRA says.
KBRA notes that while the acquisition account introduces uncertainty about the final composition of the securitization pool, “the Indenture (sic) includes several collateral quality tests that need to be satisfied in order for the acquired sites to be added to the collateral pool.”
The $70 million Diamond Issuer LLC Series 2020-1 transaction is the company’s third securitization, following $55 million and $160 million deals respectively in 2018 and 2017. Diamond is one of the largest, privately held tower and wireless companies in the U.S. KBRA gave the largest tranche, $52 million, a preliminary rating of single-A; a $6 million piece is rated BBB; and $12 million portion BB.
Diamond’s previous deal priced in November 2018 and was similarly split into Class A, B and C tranches that respectively carried coupons of 4.31%, 5.22% and 6.07%. That deal also had an acquisition-account component.
DBRS points to several risks, including a limited collateral performance history, and telecom industry consolidation that likely will put downward pressure on demand for tower space where merging companies both have equipment. On the plus side, those tenants, such as AT&T and Verizon, tend to be high quality, and the securitization portfolio is well diversified among 847 cellular sites with 1,139 individual tenant leases; no individual contract represents more than 0.3% of annualized rate run revenue (ARRR).
Longer-term prospects are attractive, according to KBRA, noting consumers’ ever-increasing demand for immediate and reliable data access and content, accelerated by the current pandemic. In addition, 5th Generation wireless and the continuing roll out of Internet of Things, will require ever increasing wireless-network capacity.
