Moody's: AT&T/Verizon JV a long-term negative for cell-tower ABS
AT&T and Verizon have teamed up with a third company to build new cell towers, and that's potentially bad news for investors in bonds backed by existing cell tower leases.
The deal with Tillman Infrastructure of New York will ultimately drive down the pricing leverage and U.S. organic-growth revenues of the big three lessors, Crown Castle International (NYSE: CCI), American Tower (NYSE: AMT) and SBA Communications (Nasdaq: SBAC), according to Moody's Investors Service.
That could have a negative impact on the credit ratings of three firms’ corporate debt. It could also put downward pressure on market lease rates and renewals in wireless tower ABS portfolios, and impact deal cash flow to the deals.
Both CCI and American Tower carry investment-grade ratings of Baa3. SBA has a speculative-grade corporate rating of B1.
All three are structured as real estate investment trusts.
Moody's latest report tempers the optimism in one it issued just a week ago extolling the positive impact of the failed Sprint/T-Mobile merger on the three cell tower companies.
SBA has been the most prominent issuer, with nine publicly rated outstanding deals totaling more than $5.7 billion, according to regulatory filings. Most recently, it completed a $760 million transaction in March. Neither CCI nor American Tower have issued new publicly rated securitizations in over two years; each has over $1 billion in existing deals issued in 2015.
AT&T and Verizon aren't the only wireless carriers looking to save money by building their own towers. In October, Sprint Corp. parent Softbank Group said it was forming its own JV with an Australian firm (Lendlease Group) to develop and acquire 8,000 U.S. tower assets – most likely with Sprint as the prime tenant.
The impact of the AT&T/Verizon and Softbank agreements may not be felt for at least 18 months, however. AT&T/Verizon plan only to construct a few hundred towers in the joint venture's first year, and its uncertain how many of Softbank's towers will be new construction. Existing carrier contracts with tower operators will not be affected since they generally cannot be canceled; shifting services to new towers could also be expensive as well as potentially disruptive to network service.
But the Verizon-AT&T agreement allows for “significantly more new towers” to be constructed in the future, according to Moody's.
"ABS cash flows could fall substantially if the joint ventures result in the construction of thousands of towers, but such activity would take several years to occur," the report stated.
Moody's already had a negative outlook on its ratings for Crown Castle, following the company's announced acquisition of LTS Group Holdings in a $1.7 billion deal. The rating agency is concerned that company will be less inclined to pay down its debt as it looks to diversify its holdings with more smart-cell tower assets that wireless providers use to extend their networks into lighter coverage areas. (CCI closed on the buyout on Nov. 1).
The three tower companies own roughly 95,000 of 120,000 wireless towers operating in the U.S., according to Moody’s.