Costly spectrum to spur US telecom capital allocation changes

Some US telecommunications and cable companies may have to make tactical changes to near-term financial strategies in order to offset the unexpectedly high cost of C-Band spectrum currently being auctioned, says Fitch Ratings. The sector generates solid FCF, providing good financial flexibility for investments. However, historically high aggregate bids may precipitate near-term capital allocation changes for some issuers. This could limit potential negative effects on credit profiles, particularly if revenue and EBITDA fail to recover to pre-pandemic levels in 2021, as we currently expect.

Early expectations were for total bidding, which began in December and will end when the bidding stops, to reach $30 billion to $40 billion. After several dozen rounds of bidding for the 280 megahertz (MHz) of spectrum, the Federal Communications Commission (FCC) has disclosed total bids of $80 billion. Aggregate bids far exceed the past record during the AWS-3 auction in 2015 but the C-Band auction is for four times the amount of spectrum. On a $/MHz-pop standard, the cost is half of the 2015 auction. The expansion of 5G technology, accelerating pace of digitalization due to the pandemic, efforts to improve competitive positions and low-cost capital are likely key drivers of the large demand for mid-band radio frequencies that could offer a competitive advantage due to coverage and capacity.

More than 50 companies registered to participate in the auction as of Dec. 3, 2020, according to the FCC website, including AT&T (A-/Stable), Verizon (A-/Stable), T-Mobile (BB+/Stable), Comcast (A-/Stable), Charter Communications (BB+/Stable), Cox Communications (BBB+/Stable) and U.S. Cellular (BB+/Stable). Many companies issued debt last year, some of which, including Verizon and T-Mobile, specifically cited funding for the purchase of additional spectrum licenses as a potential use of proceeds, but additional capital raise is possible, given large-scale bidding, particularly absent capital allocation changes.

Details on individual bids are not public and each bidders’ level of success remain uncertain. Moreover, potential returns on investment are unknown, given execution risk with deployment and revenues from 5G technology applications including next-generation connected devices and new use cases, such as autonomous vehicles and immersion entertainment, are still taking time to develop.

Credit implications from spending on the licenses being auctioned are possible and will be considered on a company-specific basis, given varying levels of cash, revenue and EBITDA growth expectations along with other funding sources such as asset sales. If the cost of additional spectrum to accommodate the growth in data services, 5G technology and the shift toward digitalization exceeds management teams’ internal expectations, Fitch believes operators are likely to prioritize capex spending for competitive reasons over debt reduction, slowing the pace of deleveraging.

Fitch’s 2021 Outlook for the North American telecommunication and cable sector is Stable, despite our expectation that gross leverage will end 2020 higher due to debt issuance to boost liquidity at the onset of the health crisis, as the pandemic’s effect on sector cash flow has been modest relative to other sectors. Fitch’s forecasts currently reflect moderate de-levering over time, as EBITDA growth resumes and FCF improves, even as capex intensity remains elevated, but do not reflect the full extent of the bidding.
CT Bureau