Moody's Lowers SBA Communications (SBAC) CFR to B1'

Moody's Investors Service has assigned a B3 rating to SBA Communications Corporation's (Nasdaq: SBAC) proposed $600 million senior unsecured notes maturing 2022. In connection with this rating action, Moody's lowered SBAC's Corporate Family Rating (CFR) to B1 from Ba3, Probability of Default Rating (PDR) to B1-PD from Ba3-PD and the company's existing debt instruments by one notch, with the exception of the $800 Million 5.75% Senior Notes residing at SBA Telecommunications, Inc., which were downgraded by two notches to B3 from B1. Moody's also affirmed the SGL-1 Speculative Grade Liquidity Rating. The rating outlook is now stable.

New issue proceeds will be used to: (i) repay a portion of the $500 million 4% Convertible Notes due October 2014 (the "Convertible Notes"); (ii) fund (and prefund) the unwinding of a portion of the Warrants associated with the Convertible Notes (we estimate the total value of the Convertible Warrants to be about $913 million based on a $100 SBAC stock price); (iii) repay the entire $244 million outstanding 8.25% Senior Notes due 2019 residing at SBA Telecommunications, Inc.; (iv) pay the call premium associated with early retirement of the Convertible Notes; and (v) for general corporate purposes. The 5.75% Senior Notes were downgraded by two notches due to our expectation that over the coming year, SBAC will insert more secured debt in the capital structure to retire the residual portion of the subordinated Convertible Notes, which are ranked lowest the debt capital structure and currently provide support for the 5.75% Senior Notes. As a result of the extinguishment of the Convertible Notes and higher proportion of secured debt, the 5.75% Senior Notes will now experience higher loss absorption under our Loss Given Default (LGD) Methodology.

Ratings Assigned:

..Issuer: SBA Communications Corporation

$600 Million Senior Notes due 2022 -- B3 (LGD-6, 93%)

Ratings Downgraded:

..Issuer: SBA Communications Corporation

Corporate Family Rating to B1 from Ba3

Probability of Default to B1-PD from Ba3-PD

$500 Million 5.625% Senior Notes due October 2019 to B3 (LGD-6, 93%) from B2 (LGD-6, 93%)

..Issuer: SBA Senior Finance II, LLC

$770 Million Senior Secured Revolving Credit Facility due May 2017 to Ba3 (LGD-3, 42%) from Ba2 (LGD-3, 41%)

$200 Million ($183 Million outstanding) Senior Secured Term Loan A due May 2017 to Ba3 (LGD-3, 42%) from Ba2 (LGD-3, 41%)

$1.5 billion Senior Secured Incremental Term Loan B due March 2021 to Ba3 (LGD-3, 42%) from Ba2 (LGD-3, 41%)

..Issuer: SBA Telecommunications, Inc.

$800 Million 5.75% Senior Notes due July 2020 to B3 (LGD-5, 85%) from B1 (LGD-5, 81%)

Ratings Affirmed:

..Issuer: SBA Communications Corporation

Speculative Grade Liquidity -- SGL-1

The assigned rating is subject to review of final documentation and no material change in the size, terms and conditions of the transaction as advised to Moody's. We will withdraw the B1 rating and LGD assessment (LGD-5, 81%) on the 8.25% Senior Notes issued by SBA Telecommunications, Inc. upon their full repayment.

RATINGS RATIONALE

The downgrade of the CFR to B1 reflects the incremental debt that SBAC is introducing into the capital structure as a result of this financing (pro forma this senior note issuance, reported debt as of March 31, 2014 will increase by approximately $412 million, resulting in about 9x Moody's adjusted debt to EBITDA, which also incorporates the operating lease adjustment associated with the recently acquired Oi towers). The rating revision also embeds our expectation that SBAC will boost leverage further over the next 6-9 months by using debt rather than equity to settle the remaining Convertible Warrants and retire the residual Convertible Notes. Though we recognize that settlement of the Warrants with debt will increase leverage temporarily and believe tower industry fundamentals and growth trends remain favorable over the next several years, we also anticipate SBAC will seek to operate with a debt-heavy capital structure and project adjusted leverage in the 8-9x range over the rating horizon, which we believe is more consistent with a high single-B rating. This is driven by our belief that: (i) a robust pipeline of higher growth international tower assets will remain available for sale over the near-to-intermediate term; (ii) SBAC will be an active acquirer to remain competitive and strategically grow its overseas tower portfolio; and (iii) SBAC will opt to use debt to fund acquisitions given its attractive cost relative to equity. We note that SBAC has issued equity in the past to partially fund acquisitions; however the equity component, on average, represented only 20% of the acquisition purchase price. Our expectations will likely preclude permanent leverage reduction over the rating horizon to a level that is consistent with a Ba3 rated tower operator, which we believe should be in the range of 7.25-8x adjusted debt to EBITDA.

In January, Moody's cautioned that SBAC may be exposed to refinancing risk given the sizable debt and warrant obligations maturing over the next 12 months. We noted that SBAC had the ability to control its capital structure and preserve the Ba3 rating by issuing equity or equity-like securities to settle the Convertible Warrants, and warned if SBAC were to raise debt to settle the Warrants, causing adjusted leverage to be sustained near or above 8.5x, the rating would likely be downgraded to B1. Though SBAC made good progress to de-lever from the 11x area (Moody's adjusted) following the debt-financed purchases of TowerCo in October 2012 ($1.45 billion in cash and stock) and Mobilitie in April 2012 ($1.1 billion in cash and stock), the recent use of debt to fund the Oi acquisitions in November 2013 and March 2014 (totaling approximately $935 million) resulted in higher-than-anticipated leverage that again pushed SBAC's adjusted debt to EBITDA outside the Ba3 rating range and postponed leverage reduction.

The B1 rating considers SBAC's scale as well as the stability of much of its revenue base and cash flow generation, which the company derives predominantly from its contractual relationships with the largest wireless operators in the US and benefits from high entry barriers. We believe the fundamentals of the wireless tower sector will remain favorable over the next several years, which should lead to continued EBITDA expansion, adjusted leverage declining below 9x and improving free cash flow relative to debt in the 4-5% range by year end 2015.

SBAC's TowerCo portfolio has high exposure to the Sprint iDen towers, which are scheduled to be decommissioned in 2015 and 2018. As a result, future revenue growth could be hampered if SBAC cannot offset the iDen revenue losses with revenue from new tenants or carriers augmenting their cell site equipment. The B1 rating embeds the company's exposure to technology network shifts, the risk of lower lease demand as a result of substitute technologies, customer concentration, the possibility of higher churn from further carrier consolidation in the US (e.g. potential combination of Sprint and T-Mobile, which collectively account for around 47% of SBAC's site leasing revenue) and the capital intensive nature of SBAC's small cell operations. These risks are offset over the near-term by the firm contracts with embedded annual escalators that SBAC has with the largest wireless carriers and by increasing revenue from the current upgrade cycle and MLA amendment fees as carriers install new cell site equipment and augment existing apparatus associated with the expansion of fourth generation (4G) LTE wireless networks across their markets.

The SGL-1 liquidity rating reflects our expectation for improved free cash flow generation and improving headroom under the company's maintenance covenants over the next twelve months, which stems from enhanced EBITDA growth. Despite our expectation for relatively higher capital expenditures owing to new tower construction, tower augmentations and ground lease purchases, we believe SBAC will maintain healthy cash levels of least $100 million (unrestricted cash balances were $323 million as of March 31, 2014).

Rating Outlook

The rating outlook is stable, reflecting SBAC's solid operating performance, visible revenue growth via a significant backlog of contractual rents and increasing wireless carrier demand. The stable outlook also reflects our expectations for continued EBITDA and cash flow expansion that will support improvement in the credit profile and leverage metrics over the rating horizon following the incremental debt to fund the settlement of the Convertible Warrants.

What Could Change the Rating - Up

Ratings could be considered for an upgrade if SBAC demonstrates EBITDA expansion and delivers the following Moody's adjusted key credit metrics on a sustained basis: debt to EBITDA below 8x, (EBITDA-Capex) interest coverage greater than 2.25x and free cash flow to debt greater than 4.5%.

What Could Change the Rating - Down

Ratings could be downgraded if weakening industry fundamentals or SBAC's aggressive expansion plans are expected to result in the following Moody's adjusted key credit metrics on a sustained basis: debt to EBITDA above 9x, (EBITDA-Capex) interest coverage in the 1x range and free cash flow to debt in the low single digits.

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