Fitch Rates T-Mobile's Senior Unsecured Notes 'BB+'/'RR3'
(The following statement was released by the rating agency)Fitch Ratings-Chicago-16 March 2021:
Fitch Ratings has assigned a 'BB+'/'RR3' rating to T-Mobile USA, Inc.'s $3 billion multi-tranche senior unsecured notes issuance. The company intends to use $2.0 billion of the net proceeds from the offering to acquire spectrum licenses pursuant to the FCC's C-Band spectrum Auction 107, with any remainder to be used first to redeem the Issuer's 6.500% senior notes due 2026, and then for refinancing existing indebtedness on an ongoing basis. The Long-Term Issuer Default Rating (IDR) for T-Mobile US, Inc. and T-Mobile USA, Inc. is 'BB+'. The Rating Outlook is Stable.
Key Rating Drivers
Material Deleveraging Expected: Fitch expects material deleveraging will occur over the forecast, supported by EBITDA growth driven by substantial cost synergies and debt reduction due to FCF growth, with excess cash used to repay maturing debt. Fitch projects T-Mobile's adjusted core telecom leverage (adjusted debt/EBITDAR based on Fitch adjustments) for 2021 will be around the mid 4x range following the acquisition of $9.3 billion of spectrum in the C-Band auction to further enhance its mid spectrum position. Fitch currently projects T-Mobile's leverage in the low 4x range in 2022. There could be upside to Fitch's EBITDA and leverage expectations if T-Mobile continues good operating momentum and synergy realization.
Merger Drives Scale Benefits: The combination of T-Mobile and Sprint Corporation is expected to create significant scale, asset and synergy benefits that should materially improve the combined entities' long-term competitive position, particularly for 5G-network capabilities. Fitch expects T-Mobile to target new or improved growth opportunities across multiple segments, including broadband replacement, enterprise, rural, internet of things (IoT) and over-the-top video.
The larger combined spectrum portfolio and selective rationalization of Sprint's network should materially enhance and further densify T-Mobile's existing network, resulting in greater speed, capacity, capabilities and geographic reach. T-Mobile's higher capacity 5G network that is supported by spectrum primarily from Sprint's mid-band 2.5 GHz band portfolio, combined with millimeter wave spectrum, covers 106 million people at the end of 2020. T-Mobile expects to increase coverage to approximately 200 million people by the end of 2021 and to more than 250 million covered by the end of 2022.
Substantial Synergies: The combined company expects to realize substantial synergies, with approximately $7.5 billion in expected run-rate cost synergies now expected compared to $6 billion previously. T-Mobile also expects to complete subscriber migration and decommissioning of Sprint's network approximately one year ahead of initially expectations. Fitch believes T-Mobile's current progress on integration plans and good integration track record following past acquisitions reduces execution risks.
Secured Debt Notching: The T-Mobile USA senior secured debt is guaranteed on a senior secured basis by all wholly owned domestic restricted subsidiaries of T-Mobile and Sprint subject to customary exceptions. The guarantees at Sprint, Sprint Communications, Inc. (SCI), and Sprint Capital Corp. are unsecured due to secured debt restrictions in the Sprint senior notes' indentures. For rated entities with IDRs of 'BB-' or above, Fitch does not perform a bespoke analysis of recovery upon default for each issuance. Instead, Fitch uses notching guidance whereby an issuer's secured debt can be notched up to two rating levels, but notching is capped at 'BBB-' for IDRs between 'BB+' and 'BB-'.
The senior secured debt -- credit facility and notes -- at T-Mobile USA receives a one-notch uplift from the IDR. This would reflect superior recovery prospects at the senior secured level of the pro forma capital structure, incorporating the value of the combined wireless network, subscriber base and spectrum portfolio.
Unsecured Debt Notching: T-Mobile USA's senior unsecured notes are guaranteed on an unsecured basis by T-Mobile and its wholly owned domestic restricted subsidiaries (including Sprint and its subsidiaries), subject to customary exception. For the Sprint senior unsecured notes at Sprint, SCI and Sprint Capital Corp., T-Mobile and T-Mobile USA provide downstream unsecured guarantees. However, T-Mobile operating companies do not provide an upstream guarantee.
Fitch views the T-Mobile USA senior unsecured notes as having a structurally superior position regarding recovery value, compared with the Sprint senior unsecured notes, due to the guarantee structure. Sprint senior unsecured notes do not benefit from a guarantee from T-Mobile operating subsidiaries, only from T-Mobile USA and T-Mobile. Fitch consequently assigned an 'RR3' recovery to the T-Mobile USA senior unsecured notes and an 'RR4' recovery to the Sprint senior unsecured notes to denote the stronger underlying asset value for the T-Mobile USA senior unsecured notes relative to the Sprint senior unsecured notes.
With secured leverage materially less than 4.0x, Fitch does not believe structural subordination is present to the point where recovery prospects at the unsecured level are impaired below 'RR4'.
Parent Support: A moderate parent-subsidiary linkage exists for the merged T-Mobile, resulting in a one-notch uplift to the standalone IDR. The operational and strategic linkages are strong when combined with material benefits derived from Deutsche Telekom AG (DT; BBB+/Stable) ownership through combined global purchasing scale, which provides significant benefits for network, handset and general procurement. DT also consolidates T-Mobile's financials and holds $4.8 billion of parent-issued debt with maturities ranging from 2022 to 2028. Legal linkages with T-Mobile are weak given the lack of parent guarantees or cross default to parent debt.
On a consolidated basis, Fitch expects the combination of T-Mobile and Sprint to have a materially improved business profile that would enhance its competitive position relative to Verizon Communications Inc. 'A-'/Stable and AT&T Inc. 'BBB+'/Stable. This is because both standalone T-Mobile and Sprint lacked sufficient scale and resources to compete across certain market segments. As such, T-Mobile is building a more expansive national 5G network that better leverages the 2.5 GHz spectrum portfolio acquired from Sprint. It would also expand growth opportunities into other subsegments, including video, broadband, enterprise, rural and IoT.
T-Mobile generated strong operating momentum during the past several years due to a well-executed challenger strategy. The company took material market share from the other three national operators and caused both AT&T and Verizon to more aggressively adapt and respond to offerings, such as equipment installment and unlimited data plans. T-Mobile's wireless business has roughly similar wireless scale with more postpaid subscribers compared to AT&T, but is materially smaller than Verizon. Given the strong subscriber momentum underpinned by its Un-carrier branding strategy, Fitch expects T-Mobile could continue to take greater postpaid share than Verizon or AT&T.
Verizon's rating reflects the relatively strong wireless competitive position, as demonstrated by its high EBITDA margins, low churn, extensive national coverage and lower leverage. AT&T's rating reflects its large-scale operations, diversified revenue streams by customer and technology, and relatively strong operating profitability.
The acquisition of Sprint's 2.5 GHz spectrum materially increased T-Mobile's mid-band spectrum position to roughly 3x more than Verizon or AT&T prior to the C-Band auction. On Feb. 24, 2021, the Federal Communications Commission (FCC) announced the winning bidders in the C-Band spectrum action. Verizon was the most aggressive participant, winning licenses with a total value of $45.5 billion out of just over $81 billion spent by operators in the entire auction. Verizon will acquire nationwide spectrum with an average depth of 161 MHz, more than doubling the company's existing holdings of licenses for low- and mid-band spectrum.
AT&T won licenses with a total value of $23.4 billion. AT&T will acquire spectrum totaling about 80 MHz nationwide, including 40 MHz in the first phase. The first 40 MHz of spectrum is expected to become available after December 2021 after an accelerated clearing process, with the remainder available after December 2023. T-Mobile won licenses with a total value of $9.3 billion totaling about 27 MHz nationwide.
Fitch expects near-term leverage for Verizon and AT&T will be elevated following the C-band auction given spending levels. For Verizon, Fitch anticipates the company's delevering path will return gross core telecom leverage (based on Fitch adjustments) to 2.5x or below by the end of 2024 based on Verizon's commitment of directing cash flow to delevering until it achieves its target metrics. Fitch does not anticipate share repurchase activity during its 2021-2024 forecast horizon.
For AT&T, Fitch expects debt reduction and a modest rebound in core EBITDA during 2021-2023 that could lead to an improvement in AT&T's credit profile, with gross core telecom leverage (based on Fitch adjustments) reaching approximately 3.0x by the end of 2023.
T-Mobile has a moderately larger scale than Charter Communications Operating, LLC's 'BB+'/Stable, with a relatively similar profile for leverage when comparing T-Mobile's adjusted core telecom leverage to Charter's gross leverage. T-Mobile has materially lower secured leverage than Charter.
Fitch's Key Assumptions Within the Rating Case for the Issuer Include:
--Revenues growing in the low single digits over the forecast to 2023;
--EBITDA (less leasing revenue) in the upper-teen range in 2021, growing over the forecast period to at least the mid $20 billion range in 2023. There could be upside to Fitch's EBITDA expectations if T-Mobile continues good operating momentum and synergy realization;
--FCF ramping over the forecast period to more than $10 billion in 2023;
--Adjusted core telecom leverage in the mid-4x range in 2021 and low-4x by YE 2022.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Strong execution and progress on Sprint integration plans while limiting disruption in the company's overall operations that materially reduces execution risk;
--A strengthening operating profile as the company captures sustainable revenue and cash flow growth due to realized synergy cost savings, and continued strong operating momentum due to increased branded post-paid subscribers;
--Reduction and maintenance of core telecom leverage (total debt/EBITDA based on Fitch adjustments) below 3x and lease adjusted core telecom leverage (total adjusted debt/EBITDAR based on Fitch adjustments) below 4.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--Additional leveraging transaction, or adoption of a more aggressive financial strategy that increases core telecom leverage beyond 4x and lease-adjusted core telecom leverage beyond 5x on a sustained basis in the absence of a credible deleveraging plan;
--Weakening of parent support that results in Fitch assessing a moderate linkage no longer exists;
--Perceived weakening of its competitive position; lack of execution on integration plans or failure of the current operating strategy to produce sustainable revenue, strengthening of operating margins and cash flow growth.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Strong Liquidity: Fitch views T-Mobile's liquidity position as strong, with approximately $4.5 billion of pro forma cash at the end of 2020 including adjustments for net proceeds from the January 2021 offering, additional payment of approximately $8.9 billion for C-band spectrum, net proceeds from the proposed offering and the redemption of the 6.5% senior notes due 2026. T-Mobile also maintains an undrawn $5.5 billion five-year secured revolving credit facility that supports the management of liquidity risks throughout the merger integration period. The $2 billion proposed issuance combined with balance sheet cash will be used by the company to pay the $9.4 billion that was bid for spectrum in the C-band auction.
T-Mobile has taken material steps to improve the maturity profile and refinance higher-cost debt during the past 12 months. In June 2020, the company issued $4 billion senior in secured notes to reduce a portion of the larger debt maturity towers within the capital structure in 2021, 2024 and 2025. In early October 2020, T-Mobile used proceeds from a $4 billion senior secured notes issuance to fully repay the $4 billion secured term loan. At the end of October 2020, T-Mobile issued an additional $4.75 billion senior secured notes. Net proceeds from the issuance were used for general corporate purposes including the refinancing of existing indebtedness. Long-term debt maturities from 2021 to 2023 include $4.3 billion, $5.6 billion and $6.4 billion, respectively.
Fitch expects FCF generation to increase materially, driven by the realization of run-rate cost synergies and a moderation in capital spending in the fourth year. Fitch's forecast assumes FCF ramping over the forecast period to more than $10 billion in 2023.
Summary of Financial Adjustments
To determine core telecom leverage of the pro forma company, Fitch applied a 2-1 debt/equity ratio to the handset receivables (leasing and EIP), after adding back off balance-sheet securitizations. Operating EBITDA excludes leasing revenue.
Tower Obligations: Fitch's treatment typically capitalizes the annual operating lease charge using a standard 8x multiple to create a debt equivalent. The operating lease expense for T-Mobile's tower obligation is included in the annual rent expense. Therefore, Fitch excluded the tower obligations from the total debt quantum, as the analysis incorporates the obligation in total adjusted debt metrics that includes capitalized operating lease expense.
Added back off-balance debt related to service receivables and EIP receivables facilities at T-Mobile.
Added back proceeds from securitization of accounts receivable from cash flow from investing to cash from operations.
When appropriate to the issuer's business model, Fitch may present additional ratios to supplement the core approach. T-Mobile's rental expense is high compared with its telecom peers given a denser cell network deployment related to the deployment of higher band spectrum. Consequently, Fitch supplements T-Mobile's core unadjusted credit metrics with lease-adjusted metrics. As part of these adjustments, Fitch re-categorized right of use asset amortization and interest associated with finance leases.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Date of Relevant Committee 19 October 2020
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
T-Mobile USA, Inc.
----senior unsecured; Long Term Rating; New Rating; BB+
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