Crown Castle ratings under scrutiny at S&P after fiber and small cell business sale

Investing.com -- S&P Global Ratings has placed the ratings of Crown Castle (NYSE:CCI) Inc., a U.S.-based independent tower operator, on CreditWatch negative following the company’s announcement of its fiber and small cell business sale. Crown Castle is selling these segments to Zayo Group Holdings Inc. and EQT (ST:EQTAB) Active Core Infrastructure Fund (EQT) for a total of $8.5 billion. Zayo will acquire the fiber business for $4.25 billion, and EQT will purchase the small cell segment for the same amount. The transaction is expected to close in the first half of 2026.

The sale is viewed favorably by S&P Global Ratings as it leaves Crown Castle with its U.S. tower operations, known for high margins, long-term contracts with annual escalators, high renewal rates with large telecom customers, and significant entry barriers. The fiber segment, which required substantial capital expenditure, has been causing discretionary cash flow deficits for the company in recent years.

Despite the positive view of the sale, Crown Castle’s plan to increase its net leverage target to 6x-6.5x from 4.5x-5x has raised concerns. This increase has led to the ’BBB’ issuer credit and issue-level ratings on the company’s senior unsecured debt being placed on CreditWatch with negative implications. The ’A-2’ short-term commercial paper rating has also been placed on CreditWatch with negative implications.

Crown Castle intends to use the proceeds from the sale to repay $6 billion of debt upon the deal’s closure. It will then initiate a $3 billion share repurchase program. At the same time, the company plans to reduce its dividend by about 33% to $1.7 billion starting in the first quarter of 2025, which S&P Global Ratings views as credit positive.

The new target leverage of Crown Castle is estimated to be about 1.5x higher than its previous target. The high end of the range (6.5x) is estimated to be about 7.1x on an S&P Global Ratings-adjusted basis. S&P Global Ratings’ downgrade threshold is 6x, and Crown Castle has been operating slightly above this level over the past year due to reduced EBITDA and negative discretionary cash flow.

Despite the potential for higher leverage post-sale, the proposed asset sale is viewed as credit positive. The remaining business, consisting of U.S. tower assets, is characterized by long-term contracts with price escalators with large U.S. telecom providers, high margins, and low capital intensity, resulting in highly predictable cash flow. The business also benefits from high entry barriers due to required zoning approvals for constructing towers.

The fiber segment, which accounted for about one-third of Crown Castle’s revenue, posed challenges to improving credit quality. Despite favorable growth trends, the fiber and small cell segment is very capital intensive. Crown Castle’s capital expenditure to revenue ratio is higher than its peers’ at about 20%, resulting in the company generating significant negative discretionary cash flow of around $1 billion annually.

S&P Global Ratings plans to resolve the CreditWatch in the coming months. It will evaluate the business risk benefits of Crown Castle deriving all its revenue and cash flow from U.S. tower operations relative to the substantial increase in its target net leverage and capital allocation plans. The possible outcomes are a ratings affirmation or a one-notch downgrade.

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