Many investors ask how S&P Global Ratings calculates leverage for certain U.S. telecommunications and cable companies. To address their questions, we are providing our analytical adjustments for EBITDA and debt for the following companies we rate: AT&T Inc., Charter Communications Inc., Comcast Corp., Cox Enterprises Inc., Equinix Inc., and Verizon Communications Inc.

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Frequently Asked Questions

What debt adjustments does S&P Global Ratings make for U.S. telecommunications and cable companies?

Many of our adjustments to a company's as-reported debt balance--such as the tax-affected unfunded portion of pension and other post-employment benefits (OPEBs), and the netting of accessible cash and liquid investments--are common across most corporate issuers. However, we also make several less-common sector-specific adjustments to debt, most notably our adjustment for captive finance operations for the wireless equipment receivables. The wireless companies offer customers so-called equipment installment plans (EIPs) to finance the cost of their mobile handsets. These plans qualify as captive finance operations under our criteria (see "Standard & Poor's Analytical Approach To Wireless Equipment Installment Plans," published March 30, 2016), in line with our captive finance criteria (see "The Impact Of Captive Finance Operations On Nonfinancial Corporate Issuers," published Dec. 14, 2015). Because we base this calculation on publicly available data, we show this adjustment for AT&T and Verizon. We do not publish our captive finance adjustment for T-Mobile US Inc., but we report the impact on selected credit metrics. As of Dec. 31, 2020, our captive finance adjustment resulted in a 0.1x improvement in the company's adjusted debt to EBITDA. (For more details on our methodology and adjustments, see "Corporate Methodology: Ratios And Adjustments" and "Guidance: Corporate Methodology: Ratios And Adjustments," both published April 1, 2019).

How does S&P Global Ratings treat wireless companies' EIPs?

EIP operations differ in many ways from traditional captive finance operations, but we believe these plans function primarily as a means to market the wireless carrier's ultimate product--its network--to end users. We also believe this is true of the traditional subsidy plan, in which wireless carriers essentially finance, or subsidize, a portion of the cost of the handset. However, a key difference (and a limiting factor in applying our captive criteria to subsidy plans) is that under EIP accounting, a long-term asset is created akin to a loan that does not exist under subsidy accounting. This financial asset can be more easily separated and monetized than service revenue receivables. As a result, we believe it is more appropriate to measure debt associated with financing equipment receivables against these financial assets as opposed to the cash flow of the underlying business.

How does S&P Global Ratings adjust for wireless companies' captive finance operations?

We make our captive finance adjustments using an estimated debt-to-equity ratio. This depends on our assessment of asset portfolio quality because these companies do not monitor and report the EIP debt and equity funding separately. Specifically, we estimate the captive's debt based on its on- and off-balance-sheet EIP receivables divided by an implied debt-to-equity ratio. The operator's net loss ratio--which is based on the historical and expected loss ratios, as well as underwriting standards--determines the estimated debt-to-equity ratio. We also derive the captive's EBITDA by calculating its revenue less operating expenses. Finally, we deconsolidate the company's captive debt and EBITDA when determining the adjusted leverage for the company. We also add back its off-balance-sheet EIP receivables to reported debt.

How does S&P Global adjust for captive finance operations in other non-core businesses?

We exclude the captive's financials from our analysis of the parent by making analytical adjustments to the reported consolidated figures, regardless of whether the captive is material to the parent's overall business or if it provides an ancillary source of income. The objective of the adjustment procedure is to enable analysis of the core business by way of deconsolidation of the captive finance operation. This is because the financial assets of captive entities can typically support, like other financial companies, a higher degree of leverage than typical industrial assets. This adjustment recognizes the differences in business dynamics and economic characteristics between captive and industrial operations and the appropriateness of using different financial measures, rather than analyzing the credit quality based on consolidated financial metrics.

Why don't you provide similar analytical reconciliation for T-Mobile?

We do not publish a full reconciliation for T-Mobile because our captive finance adjustment utilizes confidential company information. Our leverage calculation also includes adjustments for lease and tower obligations to reported debt. In addition, we net surplus cash against debt. T-Mobile's reported lease obligations totaled about $33.1 billion, which includes operating leases and finance leases. The EBITDA add-back to calculate our adjusted leverage is about $4.4 billion. Tower obligations add another $3 billion to reported debt. Our captive finance adjustments have a positive effect on credit metrics, including on adjusted debt to EBITDA, which is about 0.1x lower.

How would asset underperformance affect unfunded pensions/OPEBs?

We addressed this question with regard to Verizon, AT&T, and CenturyLink Inc., in our 2020 Credit FAQ, "Will U.S. Telcos Be Recession Proof This Time Around?," published on April 8, 2020. Although Verizon, AT&T, and CenturyLink (doing business as Lumen Technologies) have very diverse portfolios of assets to fund their pensions and OPEBs, they still have significant exposure to the public equity markets. Therefore, a decline in equity values will hurt asset returns and could increase our adjusted leverage. That said, the discount rate used to determine the pension and OPEB obligations is based on a hypothetical corporate bond yield curve, which could widen as equity returns decline, resulting in lower pension and OPEB obligations that would partly mitigate the lower asset returns.

When a company buys or merges with another, does S&P Global Ratings assess the rating based on pro forma adjusted leverage?

We generally don't assess the effect of mergers and acquisitions on ratings using pro forma EBITDA unless there's a compelling reason to do so. Pro forma financial statements allow for a more representative measure of full-year performance and more meaningful ratios, but they have limitations. First, they reflect the financial performance of the acquisition under a different management team, so at best it's an approximation of how the larger company will perform. Each company may have somewhat different accounting standards, especially for how it amortizes programming costs. Also, pro forma estimates that companies provide to the market reflect a recognition of all immediate synergies. Most synergies are realized over time (and some may not be achieved at all), and most companies' pro forma guidance doesn't include the costs (i.e., severance, restructuring) that they will incur to achieve those synergies. For example, T-Mobile's original 2018 pro forma guidance for its merger with Sprint recognized $6 billion in expected synergies (it has since increased to $7.5 billion), even though the company expected to achieve those synergies over three to four years.

How does S&P Global Ratings calculate EBITDA?

We define EBITDA as a company's revenues minus operating expenses (excluding depreciation, amortization, and noncurrent asset impairment and impairment reversals). We include any cash dividends the company receives from affiliates, associates, and joint ventures, and we exclude the company's share of these investees' profits. We also exclude any share-based compensation expense payable in shares. We include restructuring and acquisition-related costs in our EBITDA calculation but exclude asset impairments and write-downs.

How frequently does S&P Global Ratings update its adjustments?

We update our adjustments for operating leases, pension, and OPEBs once each year, when the companies release their Form 10-K annual reports. However, we have made midyear adjustments when deemed material. We update all other adjustments quarterly.

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Related Criteria

• Key Credit Factors For The Telecommunications And Cable Industry, June 22, 2014
• Corporate Methodology, Nov. 19, 2013

Related Research

• Credit FAQ: How Leverage Is Calculated For Selected U.S. Telecommunications, Cable Companies (2020 Update), April 16, 2020
• Guidance: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• Standard & Poor's Analytical Approach To Wireless Equipment Installment Plans, March 30, 2016
• The Impact Of Captive Finance Operations On Nonfinancial Corporate Issuers, Dec. 14, 2015