Fitch Ratings has affirmed Cellnex Telecom S.A.'s (Cellnex) Long-Term Issuer Default Rating (IDR) and senior unsecured instrument ratings at 'BBB-'.
The Rating Outlook is Stable. A full list of rating actions is detailed below.
The Stable Outlook reflects our view that Cellnex's leverage will improve to within our rating thresholds in three years after completing the acquisition of CK Hutchison's assets at end-2022. We estimate EBITDA net leverage at 9.6x at end-2022, which is high for the rating, but expect it to decline to 6.4x by end-2025.
Cellnex benefits from long-term contractual relationships with its customers offering mission-critical mobile tower infrastructure services, which lead to superior revenue visibility. We estimate that strong over 50% EBITDA margins should allow for healthy double-digit free cash flow (FCF) margins, once the active phase of Cellnex's build-to-suit programme (BTS) is complete.
Key Rating Drivers
Focus on Deleveraging: In November 2022 Cellnex announced that deleveraging is now its top strategic priority which, in our view, reduces acquisition risk and increases the prospect that any leverage increases will be balanced with remedial actions. The new strategy implies low shareholder distributions and no transformational transactions until the company's leverage becomes fully consistent with an investment-grade rating.
Strong Growth Prospects: Cellnex faces strong medium-term growth prospects, supported by its large BTS programme, an opportunity to increase co-location and by inflation-linked price adjustments built into its contracts. At end-3Q22 the company's reported BTS pipeline was over 20,000 sites, which is approximately 20% of its existing tower site count, with the completion horizon extending up to 2030. The BTS programme alone is sufficient to achieve low-to-mid single-digit revenue growth in the short-to-medium term. Organic growth in points-of-presence was 5.7% year-on-year (yoy) as of end-3Q22.
Strong Fundamentals: Cellnex benefits from better revenue visibility than mobile telecoms operators, supported by its long-term contractual relationships on all-or-nothing terms and low technological risk, with no viable alternative in sight to substitute passive tower infrastructure. This allows for a longer, up to three years, deleveraging path to within its rating thresholds.
All of Cellnex's contracts include all-or-nothing renewal clauses, which reduces the risk of customers switching to another tower provider or significantly reducing tower usage post consolidation. Tower infrastructure is mission-critical for the provision of mobile service, and an abrupt switch of a tower provider entails challenges of a potential service disruption or deterioration in coverage.
Disciplined Expansion into Adjacent Activities: We expect Cellnex to be disciplined in its intention to organically develop new lines of business, without compromising its deleveraging efforts. Potentially, the quality of cash flows from these activities may be inferior to that of tower leases, but at present they do not significantly contribute to shaping the company's credit profile.
Cellnex is exploring a number of organic growth opportunities that may be synergetic with its existing tower franchise, such as connecting its towers to fiber, involvement in radio-access-network (RAN) sharing or data center services.
Pan-European Diversification: Following a number of acquisitions over the last four years, Cellnex has transformed itself into a diversified pan-European tower infrastructure provider, which brings it closer in size and market coverage to US peers. It has operations in 12 countries, which reduces its dependency on a single market or customer and mitigates its counterparty exposure to weaker telecoms operators. Cellnex's customers are typically the second-, third- or fourth-largest operators in their markets, suggesting a higher risk of operating failure or consolidation by competitors than for the market leader.
Resilience to Inflation: We view Cellnex as reasonably resilient to inflation pressure, protected by price escalators in its contracts. In 2022, approximately 65% of its revenues were linked to CPI with caps, and the remaining 35% benefited from 1% to 2% fixed escalators, resulting in approximately 3% blended yoy increase. The company may continue improving its profitability as long as it can keep its cost rises at below this level. Energy costs of operating customer equipment are typically passed through while most of its own energy costs are hedged in 2023.
Improving Profitability: We project Cellnex to continue modestly improving its profitability, benefiting from its increased scale and rising co-location. Management sees substantial catch-up opportunities on newly-launched BTS sites and in countries with a low co-location ratio (it ranges from low 1.1 in Denmark to high 1.9 in Spain).
Positive FCF from 2024: Strong EBITDA margins of above 55%, and modest maintenance and expansion capex, of around 3% and up to 10% of revenues respectively, by management estimates, lead to strong intrinsic FCF generation. In the short-term FCF will be pressured by substantial investments into new BTS sites, with FCF likely turning positive from 2024. As of end-3Q22 Cellnex estimated an overall capex required for its entire outstanding BTS programme at EUR6.2 billion until 2030, largely front-loaded.
Leverage Spike to Subside: We expect Cellnex's EBITDA net leverage at around 7.5x at end-2023, assuming high-single digit organic revenue and EBITDA growth including from putting in operation new BTS sites, and some remaining regulatory-imposed asset divestment with the latter likely to have a positive 0.3x impact. We project Cellnex to deleverage to 6.4x by end-2025 on continuing improvement in its EBITDA margin and modest positive FCF contribution from 2024 onwards. We estimate Cellnex's net leverage at 9.6x on a reported basis at end-2022 but it is significantly lower on a pro-forma basis.
Derivation Summary
As a provider of passive tower infrastructure on long-term contract terms, Cellnex benefits from superior revenue stability and visibility, typical for the mobile-tower industry. Consequently, we view the operating profile as carrying less risk and having greater leverage capacity than that of telecoms operators such as Vodafone Group Plc (BBB/Stable) and Deutsche Telekom AG (BBB+/Stable), which face higher technological risks and have lower visibility on investment returns.
At 'BBB-' Cellnex is rated lower than its US-based peers American Tower Corporation (BBB+/Negative) and Crown Castle Inc. (BBB+/Stable), reflecting its higher leverage. Its American peers have more customers per tower, higher scale as measured by revenue, and stronger EBITDA margins. Cellnex's strong record of accessing debt and equity markets makes it comparable to US peers that are public REITs with easy access to financial markets. American Towers is exposed to some emerging-market risk while Crown Castle, being a US-focused tower company, has weaker geographic diversification than Cellnex.
Cellnex is rated at the same level as Infrastrutture Wireless Italiane S.p.A. (Inwit; BBB-/Stable), as both companies benefit from good cash flow visibility and operate with high leverage. Inwit has a higher share in its domestic market catering for two anchor tenants that are the leading Italian mobile operators but also its key shareholders, making it a near-captive provider. Cellnex has much larger absolute scale and stronger customer and geographic diversification across Europe. Its status of an unaffiliated neutral tower operator with good access to financial markets firmly positions it to capture future organic revenue growth.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Low-to-mid single digit organic revenue CAGR in 2023-2025
Fitch-defined EBITDA margin to improve to above 58% by 2025 from 52% in 2022
Lease payments to marginally decline as a percentage of revenue as Cellnex continues to invest in long-term lease prepayments and site land acquisitions, in line with Fitch's criteria variation (see section below)
Capex to decline to approximately 34% of revenues after the intense /front-loaded phase of the BTS programme in 2023-2024 is complete
Modest dividend distributions to 2025
No significant M&A to 2025
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A decrease in EBITDA net leverage to below 6.5x, corresponding to funds from operations (FFO) net leverage below 6.7x on a sustained basis, combined with the prospect of significantly reduced M&A risk
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Failure to reduce EBITDA net leverage below 7.0x, corresponding to FFO net leverage below 7.2x three years after the closing of the CK Hutchinson acquisition in the UK
Continuing negative, or barely neutral FCF generation or a change in EBITDA mix with a greater FCF contribution from higher-risk assets and less predictable revenue streams
Future acquisitions that reduce financial flexibility and deleveraging capacity from current levels of net leverage, in the absence of sufficient debt-reduction measures
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Strong Liquidity: We view Cellnex's liquidity as strong and sufficient to cover its capex programme and bolt-on acquisitions while its debt maturities are well-spread. The company reported that after completing the acquisition of CK Hutchison's assets in the UK in 4Q22, it had access to EUR4.3 billion of liquidity including EUR0.9 billion cash and EUR3.4 billion credit lines with three-to-five year maturities. Cellnex faces EUR2 billion of debt maturing in 2024 and EUR1.9 billion maturing in 2025. Liquidity will be further helped by FCF turning positive in 2024 under Fitch's forecasts.
Issuer Profile
Cellnex is the largest tower operator in Europe with over 100,000 sites across 12 countries. Its site portfolio is well-spread across Europe with France, Italy, Poland and Spain having the largest number of sites.
Summary of Financial Adjustments
Criteria Variation
According to our Corporate Rating Criteria, depreciation on right-of-use assets and lease interest are treated as cash costs deducted from Fitch-defined EBITDA and FFO. This reverses the positive impact on EBITDA from leases under IFRS16. Under this approach we deduct the profit-and-loss charge from EBITDA and FFO rather than from the cash flows incurred. The company has made multi-year prepayments on some of its leases. Under our criteria, these prepayments are included in the right-of-use assets and depreciated annually even though no future cash flows are paid until the end of the prepayment term.
We have thus applied a criteria variation for Cellnex whereby we will adjust our EBITDA and FFO by the lease cash costs incurred excluding cash spent on prepayments made for a period of over 10 years. This is a variation from the Corporate Rating Criteria, where the criteria adjust EBITDA and FFO by the profit and loss lease costs mentioned above. We exclude over 10 years-long cash lease prepayments on the basis that they are deemed similar in nature to capex.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
CELLNEX TELECOM, S.A. 
