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Rating Action: Moody's assigns Ba1 to US Cellular unsecured notes
Global Credit Research - 10 Aug 2020
New York, August 10, 2020 -- Moody's Investors Service (Moody's) assigned a Ba1 rating to United States Cellular Corporation's (US Cellular) proposed offering of senior unsecured notes (Unsecured Notes). US Cellular's other ratings and outlook remain unchanged. The company may use proceeds from the Unsecured Notes to redeem existing debt, including some portion of its 7.25% senior notes due 2063, and for general corporate purposes which may include acquisitions of additional spectrum licenses. US Cellular is an 82% owned subsidiary of Telephone and Data Systems, Inc. (TDS, Ba1 stable); TDS's other ratings and outlook are unchanged.
..Issuer: United States Cellular Corporation
....Senior Unsecured Regular Bond/Debenture, Assigned Ba1 (LGD4)
US Cellular's Ba1 senior unsecured debt rating benefits from the company's modest leverage, very good liquidity, a fairly conservative controlling shareholder and several valuable non-core investments, including the US's fifth largest wireless tower portfolio and a 5.5% minority stake in a wireless partnership with Verizon Communications, Inc. (Baa1 positive) in the Los Angeles market. Moody's believes US Cellular's tower portfolio and wireless partnership stake could be effectively monetized either partly or fully in order to provide additional financial flexibility if necessary. US Cellular's rating is constrained by its limited scale and the intense competitive challenges that it faces as a relatively small regional wireless operator in a consolidating wireless market comprised currently of three primary nationwide wireless operators.
US Cellular, currently in a significant buildout phase as it prepares for the commercial launch of 5G wireless services in 2021, is investing in network, equipment and spectrum licenses critical to maintaining its competitive positioning and retaining and attracting customers. The COVID-19 crisis impacted the company as it did other wireless operators initially, with reduced gross additions and equipment sales due to store closings and reduced hours accompanied by improvements in churn trends. Underscoring some of the demand resilience of the wireless industry, in the second quarter of 2020 US Cellular posted lower than historical total postpaid churn of 0.89% and delivered approximately 12,000 postpaid connections net additions. The company's retail stores are now open and consumer traffic has been increasing.
With the expiration of the FCC's Keep Americans Connected pledge on June 30, bad debt could worsen and customer demand trends could weaken with uncertainty surrounding ongoing government stimulus efforts and limited visibility into the length and nature of economic recovery. While US Cellular's service revenue was essentially flat in Q2 2020 compared to the same period in the prior year, ARPU grew 0.7% over the same period despite the COVID-19 related waiving of overage and late fees during the quarter, highlighting service upgrade activity to unlimited plans. Primarily comprised of postpaid subscribers, US Cellular's 4.87 million total retail postpaid and prepaid connections at the end of Q2 2020 were down 0.9% from the Q2 2019 period, reflecting negative net addition trends in quarters preceding Q2 2020. US Cellular's company-defined adjusted EBITDA margin improved to 28.8% in Q2 2020 from 26.4% in the prior year's comparable quarter, with lower SG&A expense a main driver. Moody's believes US Cellular's lack of scale will limit its ability to significantly improve margins and cash flow over the next two years until its 5G strategy is more fully implemented.
TDS's SGL-1 speculative grade liquidity rating indicates our expectation that the company will sustain very good liquidity through the next 12 to 18 months. TDS maintains a strong liquidity profile characterized by large cash balances and no material debt maturities until 2033, except for TDS's $50 million term loan due 2027 and US Cellular's $82 million term loan due 2027. As of June 30, 2020, TDS had aggregate cash, cash-equivalents and short-term investments of $565 million and a $400 million committed bank credit facility. US Cellular also maintains its own revolving credit facility of $300 million. Both companies' lines of credit were effectively unutilized as of June 30, 2020 (except for $1 million of outstanding letters of credit on TDS's facility and $2 million of outstanding letters of credit on US Cellular's facility); both expire in March 2025. US Cellular also has a $200 million receivables securitization agreement to permit secured borrowings under its equipment installment plan receivables for general corporate purposes. The unused capacity under this agreement was $75 million as of June 30, 2020.
For year-end 2020, Moody's expects TDS's capital spending to be almost $1.2 billion and dividends and capital distributions to minority partners to be about $80 million, resulting in about $220 million of negative free cash flow. Existing cash balances and external liquidity sources are more than ample to fund negative free cash flow. Moody's expects negative free cash flow to begin declining in 2021 largely due to moderating capital investing activity in US Cellular's 5G-related network modernization plans. Moody's expects continued but prudent capital investment intensity at TDS's wireline subsidiary under its targeted fiber overbuild strategy. Moody's expects these buildouts will be met with internal and external sources of liquidity sufficient to fund any cash shortfalls.
TDS is a controlled company because over 50% of the voting power for the election of directors of TDS is held by the trustees of the TDS Voting Trust. The company's financial policies are conservative, including maintaining a strong balance sheet with ample liquidity allowing optionality and flexibility. TDS employs a conservative financial policy with long dated repayment obligations. The company's moderate leverage is necessary in light of the competitive nature of its end markets and the high capital investing requirements which may result in periods of negative free cash flow. TDS has a $250 million share repurchase authorization that does not have an expiration date. Moody's believes repurchases of stock will remain measured, as in the past. TDS purchases US Cellular stock to maintain an 80% ownership stake. Based on our expectations of the company's cash needs, Moody's expects both revolving credit facilities to remain undrawn over the next 12 months.
The rapid and widening spread of the coronavirus outbreak, the deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The US telecom industry is expected to be more resilient than many sectors as the spread of the coronavirus outbreak widens and the global economic outlook deteriorates. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
The instrument ratings reflect both the probability of default of TDS, as reflected in the Ba1-PD probability of default rating, an average expected family recovery rate of 50% at default and the loss given default (LGD) assessment of the debt instruments in the capital structure based on a priority of claims. The Ba2 (LGD6) rating of TDS's senior unsecured notes reflects a junior position in the capital structure and the relatively significant amount of senior debt that is likely to remain outstanding at US Cellular. The senior unsecured notes of US Cellular, TDS's largest operating subsidiary, are rated Ba1 (LGD4) based on structural seniority and good asset coverage. TDS and US Cellular's senior unsecured revolvers and US Cellular's senior unsecured term loan (all unrated) are ranked ahead of US Cellular's senior unsecured notes to reflect the unconditional guarantees provided by certain TDS and US Cellular subsidiaries.
The stable outlook reflects Moody's view that TDS and its US Cellular subsidiary will demonstrate stable to growing revenue in 2020 and 2021 and that TDS's consolidated leverage (Moody's adjusted) will remain below 3.5x for the next two years.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING:
Moody's would consider an upgrade if TDS's leverage (Moody's adjusted) were sustained below 2.5x and free cash flow as a percentage of debt grew to the mid to high single-digits accompanied by consistent revenue and profitability growth.
Moody's could downgrade TDS's ratings if leverage is likely to be above 3.5x (Moody's adjusted) for an extended period and free cash flow remains negative or if revenue and profitability trends weaken and persist. Also, a decision by US Cellular or TDS Telecom to sell a material amount of assets (such as spectrum, towers or wireline properties) and distribute proceeds to shareholders could also lead to a ratings downgrade
The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered in Chicago, Illinois, Telephone and Data Systems, Inc. (TDS) is a diversified telecommunications company with approximately 4.9 million wireless customers and 1.2 million wireline and cable connections in 31 states within the US. TDS provides wireless operations through its 82% owned subsidiary, US Cellular, and conducts its wireline and cable operations through its wholly owned subsidiary, TDS Telecommunications Corporation.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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Neil Mack, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Lenny J. Ajzenman Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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