Fitch Ratings has assigned a 'BBB+' rating to American Tower Corporation's (AMT) proposed two-tranche Euro-denominated senior notes due in 2030 and 2034.

Net proceeds from these notes will be used to repay existing Euro revolver balances and Euro term loan and for general corporate purposes. Fitch expects the transaction to be substantially leverage neutral.

AMT's ratings are supported by the company's leading scale as a global tower operator, high EBITDA margins and high recurring contractual revenue associated with tower business model, and Fitch's expectation of net leverage maintained near 5.0x over our rating horizon.

Key Rating Drivers

Deleveraging on Track: Fitch expects AMT's FY2024 net leverage to be approximately 5.2x and decline further to under 5x by FY2026. The company's leverage increased to 5.6x (on a pro forma basis) following the $10.4 billion acquisition of CoreSite, which was financed with debt at close in December 2021. AMT initially funded the acquisition through revolver borrowings and term loan borrowings. Proceeds from the company's $2.3 billion equity offering in early June 2022 and the over $3 billion Stonepeak investment were used to reduce debt incurred in the acquisition.

In January 2024, AMT announced an agreement to sell India operations to Data Infrastructure Trust (DIT), an infrastructure investment trust sponsored by an affiliate of Brookfield Asset Management. Cash proceeds at close will be approximately $2.5 billion, and the transaction is expected to close in the second half of 2024 following regulatory and other customary approvals. Fitch expects the proceeds will be used to reduce debt and leverage.

Strong CFO and Margins: AMT's ratings are supported by the financial flexibility provided by strong cash from operations and high EBITDA margins, which have been in the low 60% vicinity over the last many years. The wireless tower business model translates into strong, sustainable operating performance and cash from operations growth, aided by the company's significant scale and the favorable demand characteristics for wireless services, particularly data.

Growth Model: Fitch expects AMT to continue to report strong cash flow from operations and over the longer term generate near mid-single-digit revenue growth and maintain stable margins. The company's revenue is predictable, contractual escalators embodied in long-term lease contracts provide growth, and prospects are strong for additional business. The tower industry benefits from wireless carriers' continued investments in 5G and 4G networks to meet rapidly growing demand for mobile broadband services.

Carrier investments slowed down in 2023, following record activity in the last few years when carriers started deploying 5G using spectrum investments. Fitch believes that the wireless industry's need for increased broadband wireless network capacity will continue to grow, driving demand for digital infrastructure and AMT's future revenue and cash flow growth.

Most tower tenant leases have provisions to increase rents annually based on fixed escalators (averaging approximately 3% in the U.S.), or an inflationary index in most international markets, or a combination of both. Some leases also provide for a pass through of certain costs, such as ground rent or power and fuel costs.

Diversification from International Exposure: AMT has shifted capital deployment focus towards developed markets while continuing to drive organic growth in all markets. Wireless service demand is increasing across geographies, with wireless data services at various stages of development relative to the U.S. The Telxius acquisition has allowed AMT to take advantage of such trends in developed European markets.

In 2023, the company exited its Mexican fiber business and sold its Poland subsidiary. In early 2024, it entered into an agreement to exit India. The potential for volatility from emerging markets on revenues is mitigated by the company's diversified portfolio, costs in local currencies and inflation-based escalators. In certain geographies, tenant leases provide for revenue to cover costs (pass-through revenue) for ground rent or power and fuel costs.

Strong Capital Market Access: AMT has maintained solid capital market access, not only in the U.S. and Euro debt markets, but in equity markets as well, including with infrastructure and private equity investors. The company's Euro borrowings act as a natural hedge given its operations in EMEA. In addition to the Stonepeak investment and equity offering to fund the U.S. data center business acquisition, the company funded the early 2021 Telxius Towers acquisition through a $2.4 billion common equity offering in May 2021 and $2.9 billion from joint venture partners CDPQ (30% interest in ATC Europe) and Allianz (18% interest in ATC Europe). PGGM remained a partner in certain European subsidiaries.

U.S. Consolidation Risk Manageable: Risk posed by the T-Mobile/Sprint merger was mitigated by an agreement with T-Mobile announced on Sept. 15, 2020, providing for a nearly 15-year term. Material terms of the agreement were not disclosed, but it provides much greater visibility into AMT's revenue and provides synergies for T-Mobile. The company is now past most of the Sprint churn. For FY2024, AMT guided to a 50bps Sprint churn impact on the organic tenant billings growth.

As an outcome of the Sprint/T-Mobile regulatory approval process, DISH Network Corporation acquired certain wireless assets from the merged company in July 2020 leading to the formation of a fourth nationwide operator. In March 2021, AMT announced a long-term master lease agreement with DISH for space on up to 20,000 towers.

Derivation Summary

The U.S. wireless telecom tower industry is dominated by two major participants, AMT and Crown Castle Inc. (CCI). CCI (BBB+/ Negative) focuses nearly all of its operations on the U.S. market via tower site rental revenue and fiber/small cell revenue. In contrast, AMT has some emerging market exposure, but this has been reduced through the acquisition of Telxius Telecom in 2021, which primarily operates in Europe and the acquisition of CoreSite Realty Corporation, a U.S. based data center operator. The company recently also announced an agreement to sell India operations.

Prior to acquisition activity in 2020-2022, AMT operated with moderately lower financial leverage than Crown Castle. Fitch expects AMT to maintain leverage near 5x going forward. Fitch expects CCI's leverage near 6x over the rating forecast.

A third public tower operator, SBA Communications Corp., also has a sizable share of the market with some exposure to emerging markets. Cellnex (BBB-/Stable), Europe's leading tower operator, is rated lower than its U.S.-based peers American Tower Corporation and Crown Castle Inc., reflecting its higher leverage. The U.S. tower companies have more customers per tower, higher scale as measured by revenue, and stronger EBITDA margins.

The tower industry has consolidated significantly, given AMT's acquisition of Global Tower Partners and Verizon Communications Inc.'s towers, Crown Castle's acquisition of AT&T Inc.'s and T-Mobile USA Inc.'s towers, and SBA's acquisition of TowerCo LLC and Mobilitie LLC. All three acquirers elected to become REITs and are required to distribute substantial amounts of cash. SBA operates with higher levels of leverage than either AMT or Crown Castle.

Tower operating businesses have high operating leverage, which leads to consistent profitability and strong cash flows. This is due in large part to the small incremental cost associated with adding tenants to a tower, especially when compared with the large incremental EBITDA margin growth as a result. The tower industry employs a stable business model and experiences much lower business risk than many business models within the telecommunication segment. This stability and lower risk are mainly due to long- term contracts, a stable pricing model, predictable expenses, low technology risk and long-term growth opportunities

Key Assumptions

Fitch estimates consolidated revenue of nearly $11 billion in 2024, assuming India sale closes on Oct. 1, 2024. Beyond 2024, Fitch expects organic revenue growth near mid-single digits; backed by business growth related to 5G and continued 4G capacity additions. Revenue growth is supported by existing contractual escalators throughout the forecast;

Fitch-estimated EBITDA of just over $7 billion in 2024. Thereafter EBITDA grows in line with revenues, with EBITDA margins in the historical low to mid-60% range;

Dividend growth of approximately 5% over the forecast horizon;

Annual capex averaging near $1.6 billion in 2024, with capex intensity increasing in 2025.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

EBITDA net leverage sustained below 4.5x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Capital allocation policies, such as share repurchases and leveraging transactions, that result in expectations for EBITDA net leverage sustained above 5.5x;

Organic revenue growth slows to a nominal level or flattens materially, combined with margin pressure

Liquidity and Debt Structure

Strong Liquidity Position: AMT has a strong liquidity position, supported by FCF, cash on hand and availability on revolving credit facilities (RCFs). Operationally, cash flow generation should remain strong. As of Mar 31, 2024, readily available cash was about $2.4 billion. Reported restricted cash at March 31, 2024 was $128 million. Cash held outside the U.S. generally can be used to repay non-domestic debt. At March 31, 2024, $1.9 billion of cash was held by foreign subsidiaries, of which about $309 million was held in joint ventures.

Reported unused revolver capacity was about $6.9 billion at March 31, 2024.

Debt Structure: The company's total debt of about $39 billion is largely unsecured and comprises unsecured bonds and $1.9 billion of unsecured term loans. There are two RCFs with a combined commitment amount of $10 billion.

In June 2023, AMT extended the maturities of its two RCFs and replaced LIBOR pricing benchmark with SOFR for the RCFs and 2021 term loan. The $6 billion 2021 multicurrency credit facility now matures on July 1, 2026. The $4 billion 2021 credit facility now matures on July 1, 2028.

AMT is also subject to financial covenants that limit total debt-to-adjusted EBITDA, as defined in the agreements, to no more than 6.0x (7.5x for four quarters following permitted acquisitions). The covenants limit senior secured debt-to-adjusted EBITDA to 3.0x for AMT and subsidiaries. We expect the company to remain in compliance with its financial covenants.

Issuer Profile

American Tower is one of the largest global REITs that owns and operates towers, with operations in the U.S., EMEA and Latin America. Its primary business is leasing antenna space on multi-tenant communications sites to wireless service providers and radio and television broadcast companies.

Date of Relevant Committee

22 April 2024

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.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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