Friedman analyst picks Crown Castle, SBA among tower companies

By Ronda Fears

Nashville, Tenn., March 14 - Taking a bullish position on the communications tower industry, Friedman Billings Ramsey high-yield analyst David Marsh recommended the high-yield bonds of Crown Castle International Corp. and SBA Communications Corp. along with the convertibles of America Tower Corp.

SpectraSite Holdings Inc. and Pinnacle Holdings Inc. both are the subject of questions about their ability to continue as going concerns, so the risk/reward is not adequate, Marsh said. Particularly, he expressed concern about inadequate recovery rates for the convertibles and other bonds.

Crown Castle, which Marsh referred to as "the undisputed king" of tower companies, has the best capital structure of the five tower names, Marsh said, but American Tower and SBA also have adequate asset coverage to provide public debt investors a par recovery on their investments.

"We feel that SpectraSite and Pinnacle have too much leverage in their capital structures to support their business models and we are concerned about the ability of these two companies to continue as going concerns," Marsh said in a report Thursday.

"While we believe that SITE and BIGT have adequate asset value to provide senior secured lenders with a full recovery on their obligations, we do not currently feel that the assets provide public debt investors an adequate reward for the risk that is involved in an investment in these instruments."

Marsh said he believes U.S. and worldwide demand for wireless data and telecommunications services will continue to grow over the course of this decade - slower near term but aggressively throughout the majority of this decade. He expects domestic wireless penetration rates, which grew to about 47% at year-end 2001 from 39%, to rise to 53% in 2002 and reach 66% by year-end 2005.

"If this forecast is met, wireless carriers will add in excess of 60 million new subscribers over the course of the next four years," Marsh said in the report.

"Given that existing networks are already capacity-constrained, this trend bodes very well for the tower companies, as carriers will be forced to add new cell sites in order to handle the increased demand for their products."

There are other positive factors, he said, such as the increase in average minutes of use per user by wireless customers and changes in spectrum allocations that are likely to benefit the tower companies over the long term. Also, he noted that projected carrier capital expenditures for fiscal 2002 imply that tower companies should have another year of strong revenue growth as the carriers continue to build out networks.

The single largest threat to the tower sector is potential technological improvements that could make wireless handsets more powerful, the analyst said, thus tempering the need for additional cell sites. He does not feel that these technologies will have a major impact, but because of that issue he used conservative EBITDA multiples to project the enterprise values of these companies.

For Crown Castle, Marsh estimated an enterprise value of at least $4.77 billion, and as high as $5 billion, based on 12 times projected 2002 EBITDA and the resale value of its tower portfolio. In addition to seven high-yield bonds that Marsh is recommending, Crown Castle has 6.25% and 7.25% convertible preferred issues (Caa2/CCC+) outstanding.

American Tower's (Caa1/B-) 2.25% convertible notes due 2009, 6.25% convertible notes due 2009 and 5% convertible notes due 2010 were recommended by Marsh along with the 9.375% senior notes due 2009.

For American Tower, Marsh estimated an enterprise value of between $3.37 billion and $3.42 billion, based on 11 times projected 2002 EBITDA and its tower portfolio. He said American Tower has adequate enterprise value to provide a full recovery on all classes of its senior secured and public debt. He explained that he used a slightly lower EBITDA multiple due to the relatively large portion of American Tower's revenues that are derived from specialized mobile radio customers.

While SpectraSite probably has enough enterprise value to provide for a full recovery for senior secured lenders, Marsh said he felt that recoveries for all the debt - including senior notes, senior discount notes and senior convertible notes - may be limited. Thus, he did not recommend the SpectraSite 6.75% convertible note (Caa3/CCC+) or the company's five other high-yield bonds.

"Bank covenants are restrictive, but if the company meets management's expectations, SpectraSite may be able to grow into its current capital structure," Marsh said in the report.

"We are concerned in the near term about the company's ability to comply with its bank covenants. However, if the company hits management's growth targets, it may be able to grow into its capital structure," he said, adding, "We feel that the company may have too much leverage, and may not be able to grow into its current capital structure. We currently project that the recovery for senior secured lenders has a high probability of being par, but as the company exists today, we forecast a recovery of between 31% and 41% of par value for public debtholders.

For SpectraSite, Marsh estimated an enterprise value of between $1.42 billion and $1.48 billion, based on 12 times projected 2002 EBITDA and its tower portfolio.

Recovery prospects for holders of the Pinnacle 5.5% convertible subordinated notes due 2007 (Ca/C) were worse than with SpectraSite, Marsh said, because of subordination. Senior lenders, or the banks, would likely be covered fully, he said, but recoveries on the senior discount notes and the convertible subordinated notes will be limited.

The prospects of finding out what recovery rates would be are probably highest in Pinnacle's case, too, given that management has cited near-term liquidity concerns and put the markets on notice that it may file bankruptcy sometime this year.

Marsh estimates Pinnacle's enterprise value at $525 million to $575 million, based on 7 times trailing and projected EBITDA and the tower portfolio.

"When we make an allowance for a debtor-in-possession financing facility of $50 million and bankruptcy fees of $25 million, we forecast that the recovery for senior secured lenders has a high probability of being par," Marsh said in the report.

"We believe that the recovery on the senior discount notes will be between 19% and 36%, with a higher probability of the recovery being closer to the bottom of the range. We further believe that the senior discount noteholders will receive their recovery in the form of equity in a reorganized company.

"We believe that there will be very little value left for senior discount noteholders, and that the convertible subordinated noteholders could be completely crammed down in the bankruptcy process."

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