MOODY'S ASSIGNS WESTERN WIRELESS BANK FACILITIES B1 RATING AND SR. SUB. NOTES B3 RATING
New York, 05-17-96 -- Moody's Investors Service assigned a B1 rating to Western Wireless Corporation's $950 million senior secured bank credit agreement and a B3 rating to its proposed $150 million issue of senior subordinated notes due 2006. The outlook is positive. This is the first-time that Moody's has rated the debt of this company.
The B3 subordinated debt and B1 secured bank loan ratings reflect the risks Western Wireless (Western) faces in its rapid and significant leveraging to develop a greatly expanded wireless communications sales and service network in the western U.S.; its extensive capital expenditure requirements to complete the build-out of the new PCS (personal communications services) network and fund initial operations; and the three-to five year horizon before meaningful cash flows will be generated. The ratings also take into account the likelihood of intense competition from three larger and better capitalized communications concerns for PCS in its targeted urban markets and future competition from the winners of the C-Block license auction in the BTAs (Basic Trading Areas) that lie within Western's MTAs (Major Trading Areas). The rating also incorporates the various impediments to the timely and cost-effective development of its PCS network, such as: - relocation of fixed microwave licensees, cell site acquisition and development, and affordable handsets. Further, the ratings reflect the uncertainty of wide-scale and rapid consumer acceptance of the new and still relatively expensive PCS cellular services, and long-term risks surrounding Western's choice of digital modulation standard - GSM (Global Systems for Mobile Communications). Although, GSM, at this juncture, leads other digital protocols - CDMA and TDMA - in terms of handset availability and service feature offering. The use of GSM may limit Western's subscribers' ability to roam throughout more than half of the U.S. unless more cellular or PCS operators adopt GSM or subscribers purchase special phones (dual-mode) which can transmit and receive both GSM and analog signals. Although GSM is currently the dominant digital standard in Europe and is being utilized by Sprint Spectrum's PCS venture in Washington/Baltimore and has been selected by a number of other PCS licensees, it is uncertain that, over time, GSM will maintain its current edge over other digital protocols. The steady increase in the rolls of CDMA based PCS providers and improving TDMA based digital cellular service in the 800-900 MHz band poses a sizable future competitive challenge. Western would be forced to change its digital standard and increase its capital expenditure budget if GSM becomes obsolete.
However, the rating also takes into account the likelihood that the rapidly expanding U.S. market for wireless communications services will continue its double digit growth for the next three-to-four years, and the attractive geographic clustering of Western's licensed markets. Moody's also recognizes the company's current above-average per subscriber monthly revenues, its established analog customer base of close to 240,000 subscribers, and its favorable rate of customer churn.
The rated notes are both issued at the holding company. However, both the notes and the bank facilities are effectively subordinated to Western's approximately $400 million of total permitted secured vendor financing. The rated bank credit agreement amends and expands a $750 million bank facility originally closed in June 1995. The bank agreement consists of a $750 million eight year revolving/term facility (tranche A)and a $200 million nine year term loan (tranche B). The new revolver and term loans are supported by approximately $872 million of assets, of which close to one-half are primarily FCC license related assets. At closing, the outstanding bank loans and about $34 million of vendor debt will represent about 29% of Western's capitalization. The bond holders with their subordinated position and minimal residual asset coverage, will be betting on strong free cash flow growth in three to five years. Proceeds from the debt and equity issuance will fund the development of Western's PCS network.
Although total long-term debt, pro forma for the notes offering and the pending acquisition, will be only 48% of book capitalization, Western's balance sheet will be increasingly stressed as equity is drained and drawdowns under the revolver are made to develop the PCS network. Financial statistics will gradually improve from 1997, but positive EBIT is unlikely before 1999. Western currently generates EBITDA at an annual run-rate of about $25 million. Free cash flow from operations is currently barely positive, but should strengthen over the next five years as the subscriber level approaches the 800,000 mark.
The positive outlook reflects our expectation that Western's PCS service offering will steadily gain market share in its 7 MTAs, assuming that the company prices its handsets and services competitively. Although Western's per POP license acquisition price was generally less than the average paid for A/B block licenses, the total network and service development cost will push the total investment to over $30 per POP. This huge upfront investment and the likelihood of growing price competition in its markets will preclude Western from generating meaningful free cash flows before the next century. Nevertheless, Western has a practical and logical development strategy of traditional cellular service for its rural customers and digital PCS for its urban customers. Further, if PCS can be successfully positioned as a truly new, feature rich, affordable, and reliable communications product, Western could realize its rapid-growth sales projections. The penetration rate for cellular telephone service, currently about 13% in the U.S., is likely to double over the next five years and may break 30% by 2001 as capacity constraints are eliminated and prices are reduced.
Western Wireless Corporation, headquartered in Issaquah, Washington, is a regional wireless telephone system operator. Pro forma for its new PCS licenses, it will target a market of about 25 million POPs in its western U.S. geographic markets. Key urban areas include Portland (OR), Salt Lake City, Denver, El Paso-Albuquerque, Oklahoma City, Des Moines, and Honolulu. Competition for PCS service, which is essentially a form of digital cellular service, will be from: AT&T Wireless, Sprint Spectrum, and PCS PrimeCo (a joint venture between AirTouch, US West, Bell Atlantic, and NYNEX). There will also be future competition from the winners of the C-Block PCS license auctions in BTAs which are located in Western's 7 MTAs. Management controls about 10% of the common stock on a pro forma basis.
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