United States Cellular Corporation -- Moody's assigns Ba3 to TDS's proposed preferred stock

Rating Action: Moody's assigns Ba3 to TDS's proposed preferred stockGlobal Credit Research - 23 Feb 2021New York, February 23, 2021 -- Moody's Investors Service (Moody's) has assigned a Ba3 rating to Telephone and Data Systems, Inc.'s (TDS) proposed cumulative redeemable perpetual preferred stock. Net proceeds will be used for general corporate purposes. Moody's has also affirmed TDS's Ba1 corporate family rating (CFR), Ba1-PD probability of default rating (PDR), Ba2 rating on TDS's unsecured debt and Ba1 rating on the unsecured debt of United States Cellular Corporation (US Cellular), TDS's 82%-owned subsidiary. TDS's speculative grade liquidity (SGL) rating is maintained at SGL-1, reflecting its very strong liquidity. The company's outlook remains stable.Affirmations:..Issuer: Telephone and Data Systems, Inc..... Corporate Family Rating, Affirmed Ba1.... Probability of Default Rating, Affirmed Ba1-PD....Senior Unsecured Regular Bond/Debenture, Affirmed Ba2 (LGD6)..Issuer: United States Cellular Corporation....Senior Unsecured Regular Bond/Debenture, Affirmed Ba1 (LGD4)Assignments:..Issuer: Telephone and Data Systems, Inc.....Preferred Stock, Assigned Ba3 (LGD6)Outlook Actions:..Issuer: Telephone and Data Systems, Inc.....Outlook, Remains Stable..Issuer: United States Cellular Corporation....Outlook, Remains StableRATINGS RATIONALEThe Ba1 corporate family rating benefits from TDS'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. TDS's rating is constrained by its limited scale and the intense competitive challenges that it faces as a relatively small regional wireless and broadband operator in largely mature and competitive end markets.TDS's wireline operations are broadband focused and the company seeks to prudently deploy fiber and build infrastructure in both new and existing markets to grow and defend market share and harness broadband demand trends. The bulk of TDS's consolidated revenue and EBITDA are derived from its 82%-owned subsidiary, US Cellular, which is currently operating in a significant buildout phase as it steps up execution of the commercial launch of 5G wireless services in 2021. US Cellular is investing in network, equipment and spectrum licenses critical to maintaining its competitive positioning and retaining and attracting customers.US Cellular's service revenue was up 2.6% in Q4 2020 compared to the same period in the prior year and ARPU grew 2.0% over that same period highlighting service upgrade activity to unlimited plans. Positive postpaid net additions of 11,000 represented the third consecutive quarter of positive adds, reflecting solid traction from connected devices. US Cellular posted low total postpaid churn of 1.21% which was up sequentially but still lower than the 1.38% level of Q4 2019. Primarily comprised of postpaid subscribers, US Cellular's 4.9 million total retail postpaid and prepaid connections at the end of Q4 2020 increased 1% compared with the same period in the prior year, but was relatively flat on a sequential basis. US Cellular's company-defined adjusted EBITDA margin of 20.7% decreased slightly from 21.1% in the prior year's comparable quarter due mainly to higher costs associated with equipment revenue. 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 and provides evidence supporting new revenue growth.TDS's SGL-1 speculative grade liquidity rating indicates Moody's expectations 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 $200 million term loan due 2027 and US Cellular's $82 million term loan due 2027. As of December 31, 2020, TDS had aggregate cash, cash-equivalents and short-term investments of $1.4 billion 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 December 31, 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 facilities expire in March 2025. US Cellular also has a $300 million receivables securitization agreement to permit secured borrowings under an equipment installment receivables plan; the unused capacity under this agreement was $275 million as of December 31, 2020. Subsequent to December 31, 2020 US Cellular committed to purchase wireless spectrum licenses inclusive of relocation and other costs for approximately $1.46 billion, an obligation that can be adequately met with existing year-end 2020 cash balances and liquidity availability.For year-end 2021, Moody's expects TDS's capital spending to be almost $1.3 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 2023 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, including a focused use of 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 companies' revolving credit facilities to remain undrawn over the next 12 months.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 debt reflects a junior position in the capital structure and the relatively significant amount of senior unsecured debt that is likely to remain outstanding at US Cellular. The senior unsecured debt of US Cellular, TDS's 82%-owned operating subsidiary, is rated Ba1 (LGD4) based on structural seniority and good asset coverage. TDS and US Cellular's senior unsecured revolvers and senior unsecured term loans (all unrated) are ranked ahead of US Cellular's senior unsecured notes to reflect the unconditional guarantees provided to both companies by certain TDS and US Cellular subsidiaries. The Ba3 (LGD6) rating of TDS's proposed cumulative redeemable perpetual preferred stock reflects its junior position in the capital structure and is one notch below the Ba2 rating on TDS's senior unsecured debt.The stable outlook reflects Moody's view that TDS and its US Cellular subsidiary will demonstrate stable to growing revenue in 2021 and 2022 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 RATINGS: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 downgradeThe 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.REGULATORY DISCLOSURESFor 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. 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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.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.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_1243406.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.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. 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. 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