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2022 U.S. Telecom And Cable Outlook: Slowing Growth, High Capex And Shareholder Returns Could Limit Credit Quality Improvement

U.S. wireless operators posted their strongest subscriber gains and service revenue growth in several years during 2021, rebounding from sluggish operating performance due to the COVID-19 pandemic. However, aggressive promotional activity to differentiate their 5G networks pressured margins while a massive $95 billion spend in the C-band auction pushed up leverage for all the rated carriers.

We expect wireless service revenue growth to moderate while aggressive promotions and elevated capital expenditures (capex) could hurt margins and free operating cash flow (FOCF), limiting leverage improvement in 2022. Further, the carriers spent another $22 billion in Auction 110, adding to already elevated debt levels for the winners.

Conversely, U.S. cable operators' broadband subscriber growth slowed in 2021 in the wake of pandemic-fueled demand for internet connectivity for homebound consumers in 2020. Over the next several years, competition could increase from recapitalized U.S. wireline companies, which are aggressively deploying fiber-to-the-home (FTTH) in their markets to better compete for high-margin broadband customers. However, we believe cable can still expand its broadband subscriber base in nonfiber rural markets and through edge-out opportunities, which should lead to solid--albeit moderating--earnings and cash flow growth in 2022 and beyond. The notable exception is Altice USA Inc. As such, credit quality improvement will likely depend on capital allocation decisions for most cable providers.

For U.S. wireline operators, it will likely take some time to realize the benefits from their network upgrades. Declines in legacy products and lost subsidy revenue will continue to pressure the top line over the next couple of years. That said, recapitalized balance sheets should enable them to absorb losses from FTTH builds in the near term.

Against this backdrop, there are several credit risks for U.S. telecom (telcos) and cable providers as we head into 2022:

  • Supply chain disruption and cost inflation: While there appears to be little impact from the massive global supply chain challenges on telco and cable issuers that we rate, there is some evidence supply chain disruptions could delay capital spending for FTTH builds and new 5G handsets. AT&T Inc. and Telephone and Data Systems Inc. (TDS) reduced 2021 guidance for fiber deployments or capex. Overall, we believe there is modest risk that inflationary pressures and supply chain disruptions could hurt margins and cash flow over the next year.
  • Increased competitive intensity for broadband and wireless customers: U.S. telcos and cable providers are increasingly encroaching on each other's space. Incumbent cable providers could face more aggressive price-based competition and slowing subscriber growth as telcos build out FTTH across their footprints, as well as from fixed wireless services. Similarly, competition from cable and potentially satellite-TV operator Dish Network Corp. as it launches its own retail mobile service could hurt wireless subscriber and service revenue growth over the next couple of years.
  • Higher telco capital spending for spectrum builds and FTTH deployments: The buildout of spectrum licenses acquired in the C-band auction, Citizens Broadband Radio Service auction, and Auction 110, coupled with aggressive FTTH deployments, will contribute to elevated capital spending that could ultimately weigh on FOCF generation and leverage improvement. Achieving reasonable returns on investment could take time and will require solid execution during the buildout phase.
  • Increasing shareholder returns: For both U.S. telecom and cable providers, the prospect of slower growth could push them to allocate excess cash flow to shareholder returns, rather than debt reduction. While we believe cable operators can more effectively balance shareholder returns and debt reduction, telcos have less financial flexibility given their high leverage, increased capital spending requirements, and prospects for slower growth.
  • Cyber attacks: T-Mobile US Inc.'s announcement of a data breach in August 2021 highlights the increasing credit risk of cyber attacks on telecommunications networks that could interrupt connectivity or compromise consumer data.

Rating Trends

Upgrades outpaced downgrades in 2021 for the first time since 2014. We upgraded 11 companies and downgraded 10. While U.S. telecom and cable issuers were not hurt as much by the pandemic and recession as in most corporate sectors, the rebound was also limited. Several factors drove upgrades, including improving industry dynamics, especially for cable providers; stronger business conditions; and transactions that enabled debt repayment and leverage improvement. About 11% of telecom and cable issuers we rate either have negative rating outlooks or are on CreditWatch with negative implications, compared with 20% at year-end 2020 and 30% at year-end 2019.

In 2022, we expect rating trends among U.S. cable providers to remain relatively stable despite the potential for moderating broadband subscriber growth and ongoing pay-TV customer declines. We also expect some rating upside for U.S. data center operators due to favorable industry trends, especially among interconnection providers. Even though we expect high capital spending and aggressive competition could hurt credit quality for U.S. telcos, we believe that current ratings already support these operating risks. While low interest rates and healthy capital markets could enable even low-rated issuers to refinance upcoming debt maturities, the potential for rising interest rates because of the repricing of risk, inflation, and global supply chain challenges could pressure ratings.

Chart 1


Hot Topics For 2022

Supply chain and cost input inflation.  The impact of supply chain and inflationary pressures have been somewhat muted for U.S. telecom and cable providers while many other sectors have been negatively affected. But there have been some pockets of stress, including the impact of higher energy prices on data center operators. Energy is the largest component of the cost structure for data centers after rent. Higher prices are not easy to pass along and can only be re-priced when a contract comes up for renewal. While a combination of hedging strategies and some pass-through provisions can limit the impact on margins, we believe the impact of higher energy prices on data centers may be more noticeable in 2022.

There is also some evidence that supply chain issues are impairing FTTH deployments. Already, AT&T lowered its guidance for FTTH passings to 2.5 million from 3 million in 2021. Similarly, TDS reduced its capital spending guidance by $25 million due to contractor scheduling and construction delays in 2021. Even though most telcos are constructive on their ability to manage the supply chain, we believe there is increasing risk that the combination of material and labor shortages could delay FTTH builds or pressure margins because of higher costs in 2022.

Spectrum purchases increase financial leverage for U.S. wireless carriers.   After spending $95 billion for spectrum licenses in the C-band auction in March 2021, carriers followed up with another $22 billion in Auction 110, highlighting the robust demand for mid-band spectrum. The acquisition of spectrum licenses in the C-band auction had a substantial impact on leverage for the carriers. For Verizon Communications Inc., which spent $53 billion in the auction, adjusted debt to EBITDA rose to about 3.2x from 2.5x, prompting S&P Global Ratings to revise the outlook to stable from positive and affirm the 'BBB+' issuer credit rating. At the same time, we revised the outlook on our 'BBB' rating on AT&T to negative from stable when it spent $27 billion, which pushed leverage to over 4x, modestly above our 3.75x downgrade threshold, from about 3.7x. However, we revised the outlook back to stable in May when the company announced it would merge its media business Warner Media LLC with Discovery Communications LLC, enabling it to reduce its high debt burden by about $43 billion.

While the $22 billion spent in Auction 110 was substantially smaller than what was spent the C-band auction, valuations were quite high, at about $0.71 per megahertz (MHz) POP. That will keep debt for some winners elevated while limiting leverage improvement in 2022. More important, this ongoing need for mid-band spectrum could constrain longer-term leverage improvement for mobile service providers as they try to differentiate their 5G network capabilities.

Mid-band spectrum is critical for 5G wireless technology.   Notwithstanding these financial constraints, we view mid-band spectrum (2.5-6 gigahertz, GHz) as critical for 5G wireless network deployments, given its strong throughput characteristics and better propagation than millimeter wave (mmWave) licenses. To be sure, while carriers have focused on building out nationwide 5G coverage using low-band spectrum, data speeds are not meaningfully different than 4G wireless technology. In fact, 5G using mid-band spectrum enables data speeds of 100-900 megabits per second (Mbps) while low-band spectrum usually offers speeds of less than 100 Mbps.

T-Mobile maintains a competitive advantage for mid-band spectrum, given its estimated 158 MHz of spectrum in the 2.5 GHz band that it owns from its acquisition of Sprint Corp. Further, the majority of spectrum (180 MHz) made available through the C-band auction won't come online until late 2023, which will give T-Mobile a head start in offering mid-band supported 5G service as it builds out the 2.5 GHz licenses. The company already covers 200 million POPs with the 2.5 GHz band, and it expects to expand to 250 million by 2022 and 300 million by 2023. In contrast, Verizon management stated it will cover about 100 million POPs by the end of the first quarter of 2022 and about 175 million by 2022-2023. However, in November 2021, AT&T and Verizon announced they would delay the commercial launch of the phase one licenses after the U.S. Federal Communications Commission (FCC) and Federal Aviation Administration (FAA) said action may be needed to address potential interference with aircraft electronics caused by the C-band spectrum. The carriers and FAA agreed to a two-week extension on Jan. 3. While it is unclear how long it will take to address this issue, the news gives T-Mobile more lead time in building out its own mid-band licenses.

U.S. wireline operators look to reposition themselves with fiber upgrades.  Restructured balance sheets and third-party private investments enabled several of the U.S. wirelines to invest in FTTH to better compete with cable providers for high-margin broadband customers. We estimate U.S. telco FTTH coverage will be 35%-40% in 2022, up from 31% in 2021. Longer term, we expect FTTH to cover 50%-55% of U.S. households by 2025. The biggest FTTH network expansion is from AT&T, which plans to cover about half of its footprint (30 million households) with fiber by 2025. Lumen Technologies Inc. also intends to pass 12 million homes (about 57% of its addressable market) following the sale of certain noncore assets, proceeds of which will be partially used to accelerate network upgrades. We expect the company to add about 1 million households in 2022, ramping up to 1.5 million-2 million in 2023 and beyond. Assuming telcos can achieve 40% penetration, this expansion could translate to about 30 million FTTH broadband subscribers longer term. While some of these customers will come from cable, we believe most will migrate from their existing digital subscriber line (DSL) or fiber-to-the-node (FTTN) broadband service. The latter generally offers download speeds of 50-100 Mbps, substantially slower than cable or FTTH. Furthermore, telcos should be able to increase average revenue per user (ARPU) by charging higher prices for faster internet speeds over time.

Chart 2


Building FTTH can be expensive, between $450 and $1,000 per home passed. Aggressive network upgrades will likely pressure FOCF and increase financial leverage, depending on the telcos' ability to improve their top-line and earnings trajectories. That said, the buildout cost is a function of several factors, including the companies' fiber assets and infrastructure, the use of aerial versus buried fiber, and market density. In addition to the buildout costs, we expect telcos to incur incremental labor and marketing expenses, which will likely hurt profitability in the near term.

Some telcos already use FTTN and can easily overlay the last mile connection with fiber, lowering the cost per passing relative to a greenfield build. For example, Consolidated Communications Inc. is leveraging its near-net regional fiber network to keep its cost per passing substantially below historical norms, at about $450. As part of Frontier Communications Holdings LLC's buildout plan, the company expects to spend $500-$600 per passing in its first wave, which includes the expansion of the company's fiber network to 700,000 homes by the end of 2021, leveraging its existing infrastructure and fiber assets. However, its second wave will expand FTTH to cover 6 million homes across its footprint by 2025 at an average cost of $900-$1,000 per passing. These service areas are primarily copper-based, with little fiber infrastructure to leverage. More recently, Lumen announced it would expand its FTTH footprint by 1 million homes in 2022, ramping up to 1.5 million-2 million in 2023 and beyond at about $1,000 per passing. However, the company provided little detail for this estimate and we believe the amount could be lower because of Lumen's fiber network density.

U.S. telco capital spending will increase significantly in 2022.  We expect U.S. telco capital spending to increase around 13%-15% in 2022 as carriers deploy spectrum licenses acquired in recent auctions and for FTTH builds. We base our forecast on the following factors:

  • Verizon's incremental $10 billion of capex from 2021-2023 to build out the C-band licenses.
  • AT&T's $6 billion annual increase starting in 2022, which will include FTTH deployments and spectrum builds.
  • T-Mobile's continued buildout of its 2.5 GHz licenses acquired from Sprint.
  • In addition to AT&T, the U.S. wireline operators are all in the process of aggressively deploying FTTH across their footprints.

Chart 3


Infrastructure assets are driving mergers and acquisitions (M&A)   As long as interest rates remain low and equity prices high, we expect 2022 will be another big year for M&A. In particular, we expect infrastructure assets will continue to be a target for acquisitions among private equity sponsors, infrastructure funds, and special-purpose acquisition companies (SPACs). We also expect cable providers will continue to acquire fiber assets and cloud-based platforms to bolster their enterprise capabilities. Other potential targets are likely in the fixed-line industry, where issuers are improving their broadband capabilities with fiber deployments. We would not be surprised to see some industry consolidation as most of these companies have recapitalized their balance sheets, making them more attractive as they push their FTTH initiatives.

Last year was active for M&A in U.S. telecom and cable, highlighted by AT&T's proposed sale of Warner Media to Discovery for $43 billion. Lumen also announced the divestiture of its Latin American assets to Stonepeak for $2.7 billion and its mass markets business in about one-third of its footprint to Apollo Global Management for $7.5 billion. However, most M&A activity centered around infrastructure assets. Some larger cable providers focused their efforts on enhancing their capabilities in the large enterprise market. Comcast Corp. acquired Masergy Holdings Inc., a provider of SD-WAN and other cloud-based platforms. Cox Communications Inc. purchased fiber provider MTN Infrastructure TopCo Inc.'s (d/b/a Segra) commercial business. Data center assets also received a lot of attention, and purchase price multiples have been high. Cyxtera Technologies Inc. was acquired by SPAC Starboard Value Acquisition Corp. for $493 million cash, which it used to reduce leverage. In November, CyrusOne Inc. announced that private equity sponsors KKR and Global Infrastructure Partners would acquire the company for $15 billion. Independent tower operator American Tower Corp. closed on its acquisition of data center provider Coresite Realty Corp. for $10.1 billion in December. American Tower plans to leverage these assets to jump start its mobile edge computing initiatives.

In the satellite industry, AT&T sold a 30% stake in pay-TV distributor DirecTV Entertainment Holdings LLC in a transaction valued at about $16.25 billion, enabling it to shed a business in secular decline with significant competition from over-the-top video services as well as cable TV operators. In-flight broadband connectivity provider Gogo Inc. sold its commercial aviation business to Intelsat Corp. for $400 million, and Viasat Inc. announced its plans to acquire U.K.-based satellite provider Inmarsat PLC for $7.3 billion, including the assumption of debt.

Table 1

Recent U.S. Telco And Cable Mergers And Acquisitions
Date announced Date completed Acquirer Target Price (Bil. $) Comments
9/14/2020 11/23/2021 Verizon Communications Inc. TracFone Wireless 6.3 Bolsters Verizon's share of the prepaid segment.
10/16/2020 9/17/2021 I Squared Capital

GTT Communications Inc. (Infrastructure Division)

1/13/2021 6/3/2021 American Tower Telxius 9.4 Expands American Tower's presence in Europe.
2/15/2021 5/3/2021 Cable One Hargray Holdings 2.2
2/22/2021 6/30/2021 Starboard Value Acquisition Cyxtera Technologies 3.4 Cyxtera acquired by a special-purpose acquisition company (SPAC).
2/25/2021 8/2/2021 TPG Capital


16.3 AT&T spins off DirecTV and sells a 30% stake.
3/9/2021 6/1/2021 Zayo Group Holdings, Inc. Intelligent Fiber Network n/a
4/27/2021 10/5/2021 Cox Communications Segra 5.0 Enhances Cox's enterprise capabilities.
5/17/2021 TBD Discovery WarnerMedia 43.0 AT&T will spin off WarnerMedia and merge it with Discovery.
6/30/2021 9/1/2021

Atlantic Broadband (Cogeco USA)

WideOpenWest 1.1 ABB acquires WOW's Ohio systems.
7/26/2021 TBD Stonepeak

Lumen Technologies

2.7 Lumen divests Latin American assets.
8/3/2021 TBD Apollo Funds Lumen Technologies 7.5 Lumen divests about one-third of its mass markets footprint.
8/17/2021 TBD M3-Brigade Syniverse 2.9 Syniverse will sell a large stake to SPAC.
8/25/2021 10/8/2021 Comcast Masergy Holdings n/a Acquisition enhances Comcast's SD-WAN capabilities.
9/13/2021 12/1/2021 TransUnion


11/8/2021 TBD Viasat Inmarsat 7.3
11/15/2021 12/28/2021 American Tower CoreSite 10.1 Will open opportunities in mobile edge computing.

U.S. infrastructure bill presents opportunities for cable operators.   We believe cable operators are well positioned to benefit from these funds, which could come primarily from subsidized buildouts into rural markets ($40 billion) and consumer subsidies ($14 billion). In our view, cable providers have an opportunity to expand their footprints into markets that could not produce adequate stand-alone returns because of low population density or elevated construction costs. Absent more precise broadband maps (which the FCC is updating), the exact number of homes without access to high-speed internet is difficult to determine, but we estimate it is 12 million-15 million, or about 10% of the U.S. This should enable the cable providers to continue low-single-digit percent subscriber growth three to five years from now if they receive subsidies. We believe incumbent cable operators are well positioned to receive buildout subsidies compared with new entrants because extending their plants is more cost efficient that greenfield builds. Money could be allocated by late 2022, with service required within four years of the grant. However, we recognize the process of data collection, broadband mapping, planning, and local coordination could be complicated and time-consuming.

Separately, the Democrat-controlled FCC is likely to reinstate Title II over the next year. We believe this will be used to enforce open internet concepts of no blocking, throttling, and paid-prioritization of internet traffic. It also opens the door to pricing regulation, which could be possible longer term in certain markets if rates and penetration continue to rise. However, we do not expect this considering FCC Chairwoman Jessica Rosenworcel recently testified that she does not intend price regulation.

Increasing competition could reduce cable's market share and ARPU gains, but healthy growth will persist.   We expect cable internet subscriber growth to moderate from unsustainable highs over the past two years, particularly as incremental competition from FTTH gradually intensifies. However, we expect fiber buildouts over copper wire to mostly prevent cable from converting DSL subscribers, allowing telcos to largely protect their customer bases. While modest share losses to telcos are possible, we believe it will be challenging for new fiber builds to take meaningful share because cable operators can offer internet speeds comparable to fiber (with an affordable technology path to keep pace), and scaled cable providers can also bundle broadband with TV and mobile services. Therefore, we expect successful fiber overbuilds to roughly split the market with cable when fully deployed, which will likely take several years.

Chart 4


Even if telcos execute well with their fiber deployments over the next five years, we project less than 50% of U.S. households would still not have a service capable of delivering internet speeds comparable to cable (from about 70% today). We believe these rural markets that are less likely to be built out by fiber represent a growth opportunity. Cable has historically been underpenetrated in these service areas because of a demographic that skews lower-income with lower-than-average data requirements. We believe a fundamental shift in consumer behavior toward faster, more reliable internet connections positions cable operators well in these areas. Therefore, we expect cable high-speed data (HSD) revenue to increase in the mid- to high-single-digit percent area through 2023, reflecting a combination of subscriber and ARPU growth.

Chart 5


Fixed wireless providers will primarily target DSL and lower-ARPU cable subscribers.  Consumer behavior plays to cable's strength, in our view, as exponentially rising data usage requires fast, reliable internet connections. Nonetheless, Verizon plans to cover 50 million homes with fixed wireless by 2025 (with a goal of at least 20% penetration) while it expects to target 7 million-8 million customers by 2025.

While this incremental competition poses some risk, we continue to view fixed wireless as a manageable risk to cable:

  • Fixed wireless may be an inefficient allocation of spectrum resources. There is a clear trade-off between speeds offered to customers, the number of customers that can be served per cell site, and the more lucrative business model in mobile applications, which can be monetized at a substantially higher rate per bit. To the extent a wireless carrier is spectrum-constrained, a single residential customer could crowd out traffic of many mobile customers. This could confine fixed wireless to niche locations, such as outer suburbs with good spectrum resources but lower mobile demand.
  • Fixed wireless speeds may not be sufficient, particularly for T-Mobile, which is offering typical speeds of 35-115 Mbps. We believe that five years from now, this may be limited to primarily taking share from DSL customers.
  • Fixed wireless service may not be as reliable, particularly for Verizon, which is using a higher-frequency spectrum that may face interference from trees, hills, etc. However, C-band spectrum could be more viable for HSD service given its better signal propagation.

Sector Outlooks

U.S. wireless is constrained by elevated leverage, lower FOCF, and slowing top-line growth.   Revenue growth was stronger than expected in 2021, rebounding from slower growth during the pandemic. We expect that service revenue increased about 3.5%-4% and will slow to about 2% in 2022, compared with flat growth in 2020. Our expectation for weaker service revenue growth and limited margin expansion in 2022 is due to a confluence of factors:

  • The end of pandemic lockdowns helped increase store traffic and boost subscriber growth in 2021, which won't repeat in 2022.
  • Stimulus payments allowed many consumers to upgrade handsets and migrate to higher-tier rate plans. The benefits of these stimulus checks will undoubtedly fade in 2022.
  • Competition from cable is increasing, and industry conditions are mature. It is difficult to fathom that mobile phone subscribers will continue to outpace population growth and cable has taken about one-quarter of postpaid phone net subscriber additions each quarter over the past year.
  • Aggressive promotions that subsidize a large portion of handset costs are likely to hurt profitability. While Verizon has scaled back its promotional activity for current customers, AT&T continues to use aggressive promotions to capture postpaid market share and preserve its base. Of the three large carriers, we only expect meaningful margin expansion from T-Mobile as it continues to realize synergies from its acquisition of Sprint.

Against this backdrop, carriers will increasingly depend on consumers migrating to higher-tier rate plans as they upgrade to 5G handsets to drive service revenue growth. For example, Verizon stated on its third-quarter conference call that only 30% of its customer base but two-third of new accounts were on premium unlimited plans, implying this migration will contribute to average revenue per account growth.

Chart 6


Chart 7


Exacerbating the impact of slowing subscriber growth and lower margins is the incremental debt incurred to fund spectrum purchases and capital spending requirements. The ability to monetize these investments will be challenging as most internet of things and enterprise revenue opportunities are likely several years away, in our view. While fixed-wireless broadband service could become a new revenue stream, taking share at the lower end of the market, we do not believe it will be a meaningful threat to cable or FTTH broadband service. These factors are likely to contribute to limited credit quality improvement over the early phase of the 5G investment cycle, although we expect modest deleveraging in 2022 and beyond following the spectrum purchased in the C-band auction, which pushed up leverage for all of the carriers.

Chart 8


U.S. wireline outlook is more favorable due to FTTH deployments, but higher capex and secular industry declines will weigh on near-term credit quality.  We are somewhat more bullish on the U.S. wireline industry than in the past. Recapitalizations and noncore asset sales should give companies greater financial flexibility to invest in the network to better compete with cable. And, if properly executed, investments in fiber should not only help stem the loss of broadband subscribers to cable, but also take some share.

Table 2

U.S. Fiber-To-The-Home Plans
Company Current Target

Northwest Fiber (Ziply)

30% 85%


25% 50%


23% 67%


25% 70%

Cincinnati Bell

51% N/A


16% 57%


15% 45%

Telephone and Data Systems

39% 50%
Sources: Company reports. N/A--Not applicable.

Still, secular industry declines from legacy products--coupled with lost CAF II subsidy revenue--could constrain top-line growth over the next several years. Including assets Lumen plans to sell, we forecast total U.S. wireline revenue will decline approximately 5%-7% in 2022 because of lower revenue from legacy products, coupled with lost CAF II subsidies. However, we expect top-line declines to moderate in 2023 to about 2%-4% as investments in fiber start to yield improving broadband trends.

Chart 9


At the same time, high capex and costs associated with FTTH builds will likely hurt telcos' credit quality in the near term, though our ratings already largely reflect this expectation. For 2022 and 2023, we expect capex to increase 10%-15% annually, reflecting the accelerated investments in fiber, particularly from Lumen and Frontier. While near-term credit metrics are likely to deteriorate, the longer-term benefits of FTTH deployments can be significant. In addition to potential share gains, offering faster internet speeds should translate into higher ARPU that bolsters top-line performance. That said, solid execution during the buildout phase is critical and will ultimately determine if telcos can reduce leverage longer term.

Chart 10


Chart 11


Solid earnings growth and stable capex support the U.S. cable industry, although shareholder returns could limit credit quality improvement.   Earnings growth has been robust for cable operators recently, as business services and advertising rebounded following weakness earlier in the pandemic. Furthermore, churn is at historic lows, which has bolstered profitability, with EBITDA growth peaking above 10% in 2021. However, earnings growth is likely to moderate over the next couple of years as competition gradually intensifies, partly offset by improving profitability in cable's nascent wireless business as it scales. Longer term, we believe edge-out opportunities (potentially subsidized by the federal government), continued runway for subscribers to migrate to faster internet speeds, and growth in wireless will contribute to a low- to mid-single-digit percent increase in industry EBITDA.

Chart 12


We expect cable industry capital intensity will remain stable given its ability to incrementally scale networks affordably. Cable's most significant network investment over the next few years is likely to be increasing upstream speeds and capacity. This can be accomplished by expanding the amount of spectrum dedicated to upstream, which requires changes to the active portions of the coaxial network (nodes and amplifiers) and potentially the passive portions of the network (splitters and taps). This "mid-split" or "high-split" activity coupled with footprint edge-outs is likely to increase costs moderately near term, offset by lower customer premises equipment costs as video customers decline.

Chart 13


Cable operators' financial leverage improvement hinges largely on capital allocation decisions. As profitability continues to expand, albeit at a slower rate, we expect FOCF to increase about 6%-8% in 2022 and 4%-6% in 2023, leaving most cable providers with significant financial flexibility. We do not expect additional consolidation within the sector, as midsize players Cox Communications Inc. and Altice USA are unlikely sellers. But we believe there could be continued industry consolidation among smaller players.

Chart 14


Satellite industry pricing dynamics under pressure with increasing supply on the horizon.   Despite oversupply from the launch of high throughput satellites in recent years, industry players are likely to continue to deploy higher-capacity satellites to remain competitive with the latest technology, and in some cases expand geographic coverage. We expect capex to peak in 2022 and remain elevated in 2023 as most major geosynchronous equatorial orbit operators procure and launch new satellites. We believe this will widen the supply and demand imbalance and compress yields industrywide. However, this incremental capacity could bolster growth in mobility markets, such as cruise and in-flight connectivity (IFC), that could offset secular declines in network services and media. Therefore, we expect revenue and EBITDA trends to begin to flatten in 2022 before climbing in 2023 and beyond.

Chart 15


Each satellite operator has varying exposure to these end markets and geographies, with global network services and North American media facing the most intense secular pressure. In our view, network services will continue to decline 8%-10% each of the next several years due to ongoing pricing pressure. Furthermore, secular declines in the media business will reduce revenue at least 5% annually because of content migrating to streaming platforms, signal compression technologies that reduce volumes, alternative content distribution from fiber in certain markets, and insourcing satellites used for direct-to-home video. Separately, the U.S. residential internet market will become increasingly competitive over the next five years as more terrestrial alternatives are built out, supported by the broadband infrastructure bill.

We believe there are opportunities for satellite operators to gain new business in mobility markets to help offset secular declines in other segments. IFC presents a significant long-term opportunity, in our view, particularly with the exponential increase in global capacity expected to come online that could allow operators to serve more airlines (most international airlines do not have a Wi-Fi provider), potentially at a higher average revenue per plane. However, airlines' path to recovery is determined by the evolution of the pandemic and vaccination efforts, but a return to prepandemic travel could be pushed into 2023 or later. So far, the recovery has proven to be uneven by region and uncertainty regarding the pace and timing of a return in business travel, clouding industry prospects.

Table 3

Satellite Diversity By Operator












Media 35%-40% 55%-60% 60%-65% 50% 0% 0% 0% 0% 0% 35% 0%
Mobility/internet of things 25%-30% 10%-15% 5% 45%-50% 55% 5%-10% 25% 5% 65% 65% 70%-75%
Network services/commercial 20%-25% 10%-15% 20% 10% 0% 0%-5% 5% 0%
Government 20%-25% 15%-20% 10%-15% 0%-5% 35% 45%-50% 40%-45% 20% 0% 5%-10%
Consumer broadband 30%-35% 20% 75% 0% 0% 0%
Commercial hardware 15% 10%-15% 15% 15% 0% 20%
Americas 45%-50% 30%-35% 15%-20% 90% 40%-45% 85% 70% 95% 65% 80% 50%-55%
Europe 10%-15% 35%-40% 35%-40% 30%-35% 10% 15%-20% 5% 20% 10% 15%-20%
Africa 10%-15% 5%-10% 0% 0%
Asia-Pacific 10%-15% 0%-5% 5% 15%-20% 0%-5% 10% 6%
Middle East and others 1%5-20% 20%-25% 5% 5%-10% 0%-5% 0%-5% 15% 10% 20%-25%

With U.S. wireless capex ramping up, tower operators are poised for another strong year, but M&A could increase credit risk.   We believe U.S. independent tower operators are well positioned to capitalize on robust domestic leasing activity in 2022 as the big three wireless carriers and Dish spend more to deploy their 5G networks, which are in the early stages of the multiyear investment cycle. That said, churn from T-Mobile's decommissions will be a meaningful drag on revenue growth this year. Therefore, we expect somewhat lower annual organic domestic leasing revenue growth in the 3%-4% range in 2022, compared to about 4% in 2021.

Increased spending in 2022 from wireless carriers is driven by mid-band spectrum deployment for 5G expansion, including T-Mobile's build-out of the 2.5GHz band and Verizon and AT&T's build-out of the C-band. In conjunction with these builds, carriers are actively upgrading and adding new equipment on towers, which remain the most cost-effective conduit for deploying spectrum at scale and establishing wide network coverage, resulting in healthy colocation and amendment activity. Another factor supporting the favorable outlook is our expectation for greater investment from Dish due to its 5G network build (utilizing low- and mid-band spectrum), in part to satisfy its pledge to cover 20% of the U.S. population with 5G by June 2022 and 70% by 2023. Dish believes this is still attainable despite early challenges.

While we expect an uptick in churn this year as T-Mobile accelerates decommissions of former Sprint sites, we believe the impact to tower operating performance is manageable based on the good visibility around expected lease cancellations and relatively modest associated revenue losses. Still, we believe American Tower will be most affected in 2022 given the timing of its lease expirations, despite less overall exposure compared to SBA Communications Corp. and Crown Castle International Corp. due to its more diverse and geographically dispersed tenant base.

Overall, we expect leverage for the sector will remain elevated due to aggressive growth strategies through M&A and ongoing investment. The tower businesses can support high financial leverage because of consistent earnings growth and strong and predictable cash flow generation. This flexibility allows tower companies to be aggressive in their pursuit of longer-term growth opportunities. For example, over the last 12 months, American Tower paid high multiples to acquire Telefonica S.A.'s tower portfolio and CoreSite Realty Corp.'s data center business for $19.5 billion in aggregate, partly funded with debt. We expect American Tower will continue to seek opportunities to expand its neutral hosting platform as well as in the global tower market, where new assets may come to market. Although American Tower can reduce leverage organically through EBITDA growth and discretionary cash flow generation, we expect its appetite for M&A will make it difficult to improve adjusted debt to EBITDA, which we expect will remain elevated, in the 6x-6.5x range. While we do not anticipate meaningful improvement in American Tower's credit quality, ratings pressure is unlikely given our expectation that the company will fund future transactions with a mix of debt and equity that supports our 'BBB-' issuer credit rating because of its commitment to an investment-grade rating.

Meanwhile, Crown Castle is investing heavily to deploy small cells, which face less certain demand than traditional macro towers and carry high capital requirements that result in negative discretionary cash flow. Although we expect a significant decline in discretionary capex because of fewer small cell installations, we believe Crown Castle will only modestly reduce its adjusted debt to EBITDA, remaining in the 5.5x-6x range, despite our forecast for healthy EBITDA growth of about 5%-7%. Like American Tower, Crown Castle has significant cushion against our 6.5x downgrade threshold for the 'BBB-' rating.

Retail data center demand is healthy, with interconnection the key differentiator.   Data center operators represent a diverse group of companies whose value proposition, strategy, and outlooks vary significantly. Undoubtedly, long-term growth in data traffic will drive greater need for communications infrastructure housed in these facilities. However, shifting technology and the increasing influence of cloud-based service providers will continue to distinguish between interconnected facilities that provide an attractive ecosystem, in our view, and other business models that will find it more difficult to differentiate themselves.

Connectivity-focused deployments, such as those provided by Equinix, remained resilient through the pandemic given greater connectivity and work-from-home requirements. However, many enterprise migration projects were paused due to the uncertainty. With improving economic conditions, we expect demand from enterprise clients to accelerate, particularly as site visits resume.

Chart 16


Most data center operators are expanding to meet demand. Thus far, supply chain issues have not had a significant impact on construction activities due to vendor agreements that lock in inventory purchases 12-18 months in advance. However, if constraints persist, these issues could slow expansion activity later in the year. While this could slow revenue growth estimates somewhat, we believe it would improve cash generation for affected operators. It could also drive up pricing in certain markets with tighter supply.

This report does not constitute a rating action.

Primary Credit Analysts:Allyn Arden, CFA, New York + 1 (212) 438 7832;
Chris Mooney, CFA, New York + 1 (212) 438 4240;
Secondary Contact:Ryan Gilmore, New York + 1 (212) 438 0602;
Additional Contact:William Savage, New York + 1 (212) 438 0259;

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