American Tower (AMT) Ratings Affirmed by Moody's Amid Verizon Deal
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Moody's Investors Service ("Moody's") affirmed American Tower Corporation's (NYSE: AMT) senior unsecured rating at Baa3 and senior unsecured shelf rating at (P)Baa3 following the REIT's announcement of a proposed $5.056 billion acquisition of Verizon Communications, Inc.'s ("Verizon") tower portfolio; the rating outlook remains negative.
American Tower announced yesterday that it has agreed to purchase approximately 165 wireless communications towers and acquire rights to approximately 11,324 additional towers from Verizon for $5.056 billion in cash at closing. AMT will have the exclusive right to lease and operate the Verizon towers for approximately 28 years and an option to purchase the leased towers for a fixed price at the end of lease term. The transaction is expected to close during the first half of 2015.
The rating affirmation reflects Moody's view that the acquisition is fundamentally a credit positive and would bolster American Tower's presence in the domestic market. It also assumes that AMT's financing of the transaction would include a sizable equity component that in combination with AMT's robust cash flows would allow American Tower to delever to pre-transaction level within 12- 18 months following the acquisition. Additionally, it reflects Moody's expectation that American Tower would operate within its stated net leverage target range of 3x -- 5x (per AMT's definition) going forward.
While serving to enhance American Tower's asset portfolio and its competitive position in a domestic market, initially the acquisition will result in higher leverage and delay American Tower's deleveraging plans. Furthermore, the transaction comes before the REIT has fully restored its leverage from the 2013 Global Tower Partners ("GTP") acquisition. AMT's Net Debt/EBITDA after adjusting for operating leases was still high at 6.1x (including Moody's adjustment for operating leases) as of the end of 3Q14.
RATINGS RATIONALE
American Tower's current Baa3 senior unsecured rating reflects the REIT's robust cash flows supported by its profitable business, wide geographic footprint, ample liquidity, and long-term tenant leases with contractual rent escalations. Moody's expects that AMT's strategic importance to wireless carriers and attractive industry growth prospects will continue to contribute to AMT's franchise strength going forward. As a result of the Verizon towers' acquisition the REIT would enhance its domestic tower base by 40% to approximately 40,000 sites. Verizon's portfolio is well located, with approximately half of the sites in top 100 BTA and one third in top 50 BTAs; however, the portfolio has a low tenancy ratio of 1.4 tenants per tower versus AMT's current domestic tenancy ratio of 2.5 tenants per tower. Over the intermediate to long term, this creates an opportunity to enhance the profitability of the acquired portfolio by leasing up the tower space to additional tenants with minimal incremental cost.
These credit strengths are counterbalanced by American Tower's elevated leverage following a large debt-funded acquisition in late 2013. While AMT benefits from its major tenants' strong credit quality, the REIT's tenant concentration is high, especially within its domestic market where the top four tenants contribute about 83% of AMT's domestic rental and management segment revenue. The proposed Verizon transaction will further increase tenant concentration. AMT's ratings are also constrained by its exposure to technology network shifts or major technological transformation and untested alternative use for its properties should such dramatic changes occur - risks that are not typically associated with traditional commercial property REITs.
The negative rating outlook reflects the additional risk that American Tower will face in restoring its leverage in the next 12-18 months as it integrates its newly acquired portfolios.
The rating outlook would likely be stabilized once American Tower has de-levered to below 5.0x net debt/EBITDA (or under 6x after applying Moody's adjustments). Continued successful execution and integration of recent acquisitions as well as ample liquidity would also be needed for a return to a stable rating outlook.
The rating will be downgraded as a result of the REIT's failure to de-lever its balance sheet such that net debt/EBITDA is not reduced to the mid-5 times (per AMT definition) or under mid-6 times (after applying Moody's adjustments) by year end 2015. Any acquisition integration or liquidity challenges would also be viewed negatively, as well as any other leveraged acquisitions.
Moody's most recent action with respect to American Tower took place in September 2013, when the rating agency affirmed Baa3 senior unsecured rating and revised ratings outlook to negative from stable.
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