After years with astronomical leverage levels and ratings at the lower end of the speculative grade scale, wireless tower companies across the board are looking up, as they are reaping the benefits of currently predictable cashflows and growing demand for services in a market with high barriers of entry.
This newfound favor is attributable in large part to the increased demand from cell phone companies and other providers of wireless services, which now provide tower companies with a very predictable, high gross margin stream of cash flow, explained David Marsh, a senior vice president in high yield research for Friedman, Billings, Ramsey & Co., Inc. "Once you've constructed the asset, there is very little maintenance expense associated with it," he said.
The high-yield loan and bond markets could soon lose business from several tower companies, however, as they may follow the footsteps of two competitors, Crown Castle International Corp. and Global Signal Inc., by replacing, or at least reducing, their high yield bond and bank debt with a securitized deal in order to get lower rates.
"It may take some time for some of them, but [wireless tower companies] are likely to leave those markets and use the securitization market as their source of funding," said Marsh, who covers Crown Castle, American Tower Corp. and SBA Communications Corp. "The reason they are able to access that market is because they have very high and very predictable gross and EBITDA margins," he explained, noting that the contracts typically are for five years and have renewal language that can extend them out to 25 or 30 years.
Houston-based Crown Castle recently refinanced its $1.9 billion of bond debt, which had coupons ranging from 4% to 11.25%, and the $108 million outstanding on its existing credit facility. In turn, the company entered into a $275 million, one year revolver with a floating spread of Libor plus 200 to 275 bps, and it issued $1.9 billion of commercial mortgage-backed securities with an interest rate of 4.89%.
"It was much cheaper," said Ben Moreland, Crown Castle's CFO. "We finally got our leverage down to a level where we thought we could refinance in the [securitized] market with investment grade ratings," he explained.
And SBA, whose capital structure includes leveraged bank loans and high yield bonds, is also entertaining the option of a securitized deal. "It has been done successfully in the industry and it is very cheap money compared to our other debt," said Pam Kline, SBA's vice president of capital markets.
To be sure, the industry has not always experienced such positive financials. Only a few years ago, these companies held leverage that was high, as consolidation through acquisitions pushed debt levels up. In turn, companies in the sector were rated in the low single Bs and triple Cs, and two issuers went into bankruptcy. And while some market players say these companies had previously been rated too low, the companies' business profiles have nevertheless improved in recent years.
Indeed, the sector's improved conditions have enhanced the credit quality of wireless tower issuers. For example, American Tower's newly inked acquisition of SpectraSite, Inc. earned the company's bank debt an investment grade rating from Fitch Ratings and Standard & Poor's. In fact, all four wireless tower companies rated by S&P earned upgrades in late July.
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