American Tower - Industry Leading Capital Structure

Last Updated Dec 4, 2008 2:41 PM EST

American Tower LogoAmerican Tower is a leading owner and operator of communications sites for the wireless and broadcast industries, with more than 23,000 sites in the United States, Mexico, Brazil and India. The company's has grown its communications site portfolio through acquisitions and tower construction activities, primarily funded from cash flow from operations and debt and equity offerings. Looking forward, how might the constrained credit environment affect American Tower's growth prospects?American Tower's balance sheet is highly leveraged, with long-term indebtedness of $4.4 billion -- more than 1.5 times stockholder equity. The company's debt contains certain minimum financial ratios and operating covenants, such as debt service coverage ratios and additional loan restrictions. To their credit, Chief Executive Jim Taiclet and his management team have nimbly danced around a debt reckoning, as evidenced in the third-quarter 2008 regulatory filing:
  • In order to extend the maturity dates of our indebtedness, lower our cost of debt and improve our financial flexibility, we use our available liquidity and seek new sources of liquidity to refinance and repurchase our outstanding indebtedness.
In May 2007, the company, in a private transaction, issued $1.75 billion of Commercial Mortgage Pass-Through Certificates, Series 2007-1, backed by debt of two special-purpose subsidiaries (secured primarily by mortgages on their interests in 5,295 broadcast and wireless communications towers and the related tower sites). In effect, the company securitized some of its outstanding debt.

During the nine-months ended September 30, the company raised an additional $325 million of term loan commitments, with the proceeds used to repay -- and extend the maturity dates -- of a similar amount of indebtedness.

As of September 30, American ended the quarter with substantial room under its covenant restrictions: (i) leverage equal to 3.9 times annualized adjusted EBITDA, below debt maintenance covenants of six times adjusted EBITDA; (ii) debt service coverage of approximately 4.3 times, above the required EBITDA/Interest coverage of 2.5 times.

American Tower's financial position remains solid relative to its publicly traded peers, with Crown Castle Int'l and SBA Communications sporting total debt 1.8 times equity and 7.0 times equity. In addition, the comparable, weighted average term of debt for American Towers, Crown Castle, and SBA was 5.2 years, 2.6 years, and 3.1 years, respectively, at September 30.

American Tower has approximately $600 million of liquidity and no material maturities until 2012. In the unlikely event that credit markets were to remain dislocated over the time period until these maturities occur in 2012, management believes that its operations would generate sufficient internal cash from operations to pay off the approximate $2 billion in 2012 maturities.

The company's tower leasing business, however, depends on a handful of wireless carriers, with 65 percent of revenue derived from the top five U.S. Carriers, including AT&T (21 percent), Sprint Nextel (20 percent), and Verizon Wireless (11 percent).

Taiclet remains optimistic about growth prospects for 2009, telling analysts on the third-quarter 2008 earnings call that AT&T and Verizon continue to experience substantial revenue growth from bandwidth hungry customers. "Wireless services has become a necessity rather than a luxury," said Taiclet. "Even in difficult economic times wireless subscribers and usage should continue to grow."

In spite of the turbulence in the broader economy and credit markets, Taiclet opined that that wireless end-users -- the consumers -- typically do not need financing to pay their monthly bill or even to purchase handsets. Therefore, unlike buyers of automobiles, housing or other big-ticket items the wireless industry's customer base should be able for the most part to continue to afford wireless service. As rates for data services continue to come down, more and more people should find 3-G an affordable option, too.

Long-term non-cancelable revenue contracts totaled $9.2 billion at September 30. And, about 65 percent of tower revenue contracts are not up for renewal until 2013.

American Tower, supported by stable and growing operations, expects to generate cash flow from operations in 2009 on the order of $865 million -- leaving excess cash to fund international tower expansion plans in India.
  • David Phillips

    David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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