Vertical Bridge, a cell tower operator founded by former executives of Global Tower Partners, is making its first call on the securitization market.
The deal, dubbed VB-S1 Issuer, Series 2016-1, will issue three classes of fixed-rate notes totaling $321 million with a bullet maturity of June 2021; until that date, they will pay only interest. The senior tranche, which benefits from 25.2% credit enhancement, is rated ‘A’ by Fitch Ratings and ‘A2’ by Moody’s Investors Service.
That’s in line with Fitch’s top rating on a deal completed by competitor SBA Communications in October. But it’s two notches lower than the ‘AAA’ that Fitch assigned to the senior tranche of American Tower’s most recent deal, completed in May 2015.
Vertical Bridge’s inaugural deal will also issue two subordinate tranches of notes; Fitch assigned a ‘BBB’ rating to one with 16.2% credit enhancement and a ‘BBB-‘ rating to another tranche with no credit enhancement. Moody’s is not rating the subordinate tranches.
Deutsche Bank Securities is the deal’s structuring agent; Midland Loan Services is the servicer.
The notes are backed by a pool of 2,378 wireless tower sites and related tenant leases. The issuer will pay principal and interest due on the notes from lease revenue from the wireless tower tenants, predominantly the major telecommunication carriers.
Additional notes may be issued from the trust, subject to certain conditions including a rating agency confirmation.
Among the deal’s strength, according to Moody’s, is that the towers are of more recent construction relative to existing securitized portfolios and, consequently, they have fewer average tenants per tower (1.6 compared with 2.1 to 3.2 for existing portfolios). That leaves room for growth.
In addition, the VB-S1 2016-1 collateral pool has a net cash flow margin well below its peers, 67% compared with 72% to 89%. “Wireless tower sites have a high initial fixed cost, but the marginal cost of new tenants is relatively small thereafter,” Moody’s states in its presale report. “As such, both lease cash flows and margin should increase as the manager negotiates leases with new tenants for the towers.”
Fitch sees composition of tenants as a major strength. Telephony tenants represent approximately 85% of the annualized run rate revenue (ARRR). The tenant leases have weighted average annual escalators of approximately 3% and a weighted average final remaining term (including renewals) of 25.1 years. The largest tenant, AT&T (31.4% of ARRR) is rated investment grade by Fitch.
Both rating agencies see the short operating history of Vertical Bridge – it was founded in 2014 – as a mixed blessing. While the new company has never previously issued a securitization, its founders come from GTP, which issued $2 billion in securitized notes between 2007-13 before being acquired by American Tower.