Moody’s Baa3 Rating Disregards Crown Castle’s Material 2021 Debt Maturity, While Equity Markets Have High Expectations

Moody’s is understating the credit risk of Crown Castle International Corporation (NYSE:CCI) with its Baa3 rating. Our fundamental analysis highlights a riskier credit profile for CCI, whose cash flows would fall short of operating obligations through 2022. Moreover, their cash flows and cash on hand would not be sufficient to service all obligations including debt maturities. We therefore rate CCI four notches lower at an HY2+ credit rating, or a B1 equivalent using Moody’s ratings scale.

On the other hand, CDS markets are materially overstating CCI’s credit risk with a CDS of 297bps relative to an Intrinsic CDS of 134bps, while cash bond markets are slightly overstating credit risk with a cash bond YTW of 3.253% relative to an Intrinsic YTW of 2.713%.

In contrast to credit markets, equity markets currently have very high expectations for CCI. The firm is trading at a 2.5x V/A’, at the high end of historical valuations. The market is expecting ROA’ to significantly improve from 8% to 11%, with high 10% Asset’ growth going forward. This indicates that even if the firm does successfully see an ROA’ expansion and improved asset utilization and margins on their fixed asset base, equity upside is unlikely as the market is already expecting this scenario. However, if the firm does not successfully see ROA’ reach levels well above the historical peak in the next five years, but rather just sees ROA’ marginally expand going forward as analysts expect, there could be material equity downside.

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