Fitch Ratings has assigned a 'BBB+' rating to T-Mobile USA, Inc.'s (TMUSA) new multi-tranche senior unsecured notes issuance.
The Long-Term Issuer Default Ratings (IDRs) for T-Mobile US, Inc. (T-Mobile; parent and financial statement filer), TMUSA and related entities remain at 'BBB+' with Stable Rating Outlooks.
The senior notes will be pari passu with TMUSA's other unsecured debt. Net proceeds from the notes offering will be used for general corporate purposes, which may include share repurchases, dividends, debt refinancing, among other things.
Key Rating Drivers
Strong Operating Momentum: T-Mobile's business has materially improved since the April 2020 Sprint acquisition, with strong execution on merger integration that has resulted in significant expansion of 5G coverage and capacity and greater scale. Fitch-calculated EBITDA is projected to be more than $30 billion in 2024 versus $26.1 billion in 2021, or the first full year after the Sprint merger, and meaningfully above $12.8 billion in 2019.
T-Mobile is well-positioned to realize continued growth across multiple segments. This includes targeting smaller markets/rural households through additional capital investments and increased distribution and marketing spend that could increase T-Mobile's market share penetration in these markets to greater than 20% by 2025 based on company reporting (16.5% as of its latest reporting in 1Q23).
Leading 5G Network, Scaling Broadband: T-Mobile's Ultra Capacity 5G network deployment that covers 300 million Americans underpins the company's strategy to market broadband fixed wireless access (FWA) services. T-Mobile gained considerable traction in the past few years with more than 500,000 net additions each quarter since 2Q22 and 4.2 million total FWA customers as of September 2023.
Fitch views T-Mobile's medium-term target of 7 million-8 million fixed wireless subscribers by 2025 as achievable. Other material growth opportunities include increased market share of enterprise and government users and increased penetration of premium rate plans (including Go5G plans), which is more than 20% of the overall post-paid customer base.
Leverage Expectations: Fitch calculates EBITDA leverage was near 2.5x at September 2023 versus high-3.0x in 2020 (after certain handset lease adjustments) following the Sprint deal. EBITDAR leverage is higher currently in the low- to mid-3.0x range. Fitch anticipates leverage could remain at or above current levels over time, with higher debt projected in the ratings horizon as EBITDA continues to grow. Fitch expects T-Mobile will maintain a measured and balanced approach to capital allocation. The company's net leverage target of approximately 2.5x equates to similar EBITDA leverage (mid-2.0x) and EBITDAR leverage in the 3.5x area, based on Fitch adjustments.
Healthy Cash Flows: Fitch views the company's strong and reasonably stable free cash flow generation as a credit positive. T-Mobile generated solid FCF of $5 billion-$7 billion per year, per Fitch calculations, in 2021-2022 and could realize more than $13 billion annually in the next few years, with projected lower capex spend and higher EBITDA. Fitch expects the company will continue to invest in its network, with much of its excess cash flows used for shareholder returns.
During 3Q23, T-Mobile authorized a shareholder return program of up to $19 billion through 2024 which is an extension to its prior program for up to $14 billion through 3Q23. As part of the new program, T-Mobile implemented a quarterly dividend of $750 million ($3.0 billion annualized) that is expected to increase by roughly 10% annually (first increase expected in 4Q24).
Highly Competitive Wireless Environment: The wireless market remains competitive, characterized by elevated device promotional costs and competition from cable operators. The three leading U.S. operators acquired additional spectrum to bolster their 5G positions for national 5G deployments resulting in increased speed, capacity, capabilities and geographic reach. DISH Network is a distant fourth national operator, in terms of network and subscribers that remains in the relatively early stages of building out a nationwide network.
Cable entry into the wireless market increases competition and continues to gain traction with strong net additions that increased aggregate wireless subscribers for Comcast Corp. (A-/Stable) and Charter Communications, Inc. (BB+/Stable) to 13.5 million as of 3Q23. Cable operators have used aggressive subscriber promotions and could gain more incremental postpaid market share in 2024. Nevertheless, Fitch views potential negative effects on T-Mobile as manageable given cable operators' more niche customer focus and the company's multiple growth opportunities across consumer and business segments.
Parent-Subsidiary Linkage: T-Mobile's ratings receive a one-notch uplift from its standalone credit profile due to its controlling shareholder Deutsche Telekom AG (DT; BBB+/Stable). Fitch believes a medium strategic linkage exists between the two companies given T-Mobile's importance to DT due to moderate growth potential and substantial financial value to DT's group profile. DT consolidates T-Mobile's financials by virtue of its voting control of more than 55% of outstanding shares and holds $1.5 billion of T-Mobile USA-issued debt maturing 2028. Across T-Mobile's corporate structure, Fitch's equalizes the IDRs, due to the presence of strong legal, operational and strategic ties among the entities.
Derivation Summary
T-Mobile (BBB+/Stable) has a materially improved business profile following the combination with Sprint in April 2020, reflecting good execution on integration plans that exceeded expectations for synergies and network migration. This in turn has led to an enhanced competitive position relative to Verizon (A-/Stable) and AT&T Inc. (BBB+/Stable). With EBITDA leverage projected in the mid-2.0x range over the ratings horizon, solid EBITDA growth and healthy FCF generation, the company is well positioned at the 'BBB+' IDR relative to its telecom and cable peers.
T-Mobile has made significant progress in combining the spectrum portfolio and selective rationalization of Sprint's network to build a more expansive and densified national 5G network resulting in greater speed, capacity, capabilities and geographic reach. T-Mobile's Ultra Capacity 5G network is supported by spectrum primarily from Sprint's mid-band 2.5 GHz band portfolio, combined with substantial low-band and millimeter wave spectrum. Its 5G network covers more than 330 million people and the Ultra Capacity 5G network covers 300 million Americans.
T-Mobile generated strong operating momentum during the past several years due to a well-executed challenger strategy. It has taken material market share from the other national operators and caused both AT&T and Verizon to more aggressively adapt and respond to offerings, such as equipment installment and unlimited data plans. T-Mobile's wireless business has roughly similar wireless scale with more post-paid subscribers and lower EBITDA margins compared with AT&T but is materially smaller than Verizon. Given the strong subscriber momentum underpinned by its un-carrier branding strategy, Fitch expects T-Mobile could continue to grow its share among the national operators.
Key Assumptions
Service revenue growth (postpaid and prepaid service revenue excluding wholesale) in the mid-single-digits over the forecast period. This growth more than offsets revenue decline from the sale of the Sprint wireline assets and declining wholesale revenue from DISH;
EBITDA (less leasing revenue) increasing to the mid-$27 billion range in 2023 and more than $30 billion in 2024;
T-Mobile primarily has fixed cost debt within its capital structure. Interest costs in the mid-$3 billion area in 2023, increasing to more than $4 billion over the forecast period;
FCF in the high-$12 billion range in 2023, based on Fitch adjustments, driven by EBITDA growth and reduced capital spending and cash payments for merger-related costs. FCF growth in the next couple of years with lower capex projected, this will be partially offset at least by the implementation of a $3 billion annual dividend;
Cash merger expenses between $1.6 billion to $2.0 billion in 2023, decreasing in 2024;
Share repurchases remain a primary use of CF (nearly $11 billion spent YTD through September 2023).
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Demonstration of a consistent capital allocation policy by balancing shareholder returns and other strategic investments with the medium-to-longer-term maintenance of T-Mobile's EBITDA leverage below 2.2x and EBITDAR leverage below 3.2x;
Continued good subscriber momentum coupled with operational performance that is in line with Fitch's current forecast expectations for growth in revenue, EBITDA and FCF generation;
--(CFO less Capex)/debt sustaining near the upper-teen range.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Leveraging transaction, or adoption of a more aggressive financial strategy that increases EBITDA leverage beyond 2.75x and EBITDAR leverage beyond 3.75x on a sustained basis in the absence of a credible deleveraging plan;
Operating profit declines owing to greater than anticipated competition, or other operating/executional missteps could lead to negative action if a return to stability is uncertain;
A negative action to DT's ratings or weakening of parent support that results in Fitch assessing a medium linkage no longer exists.
Liquidity and Debt Structure
Strong Liquidity: T-Mobile's liquidity position is strong, with $5.0 billion of cash at 3Q23. In October 2022, T-Mobile upsized its unsecured revolving five-year credit facility to $7.5 billion that matures October 2027 from $5.5 billion. The credit facility backstops its undrawn $2.0 billion commercial paper program. The revolving facility is undrawn. Fitch expects FCF generation to increase materially, driven by EBITDA growth supported by the realization of run-rate cost synergies, reduction in cash merger costs and a moderation in capital spending in 2023 with FCF in the high-$12 billion range compared to $6.9 billion in 2022, based on Fitch adjustments. FCF assumptions include the implementation of a $750 million dividend in the fourth quarter of 2023 as part of an annualized dividend of around $3 billion beginning in 2024.
Debt Profile: T-Mobile has a diverse capital structure, with more than $70 billion of Fitch-calculated debt outstanding pro forma for the new notes issuance. T-Mobile USA, Inc. is the primary debt issuer and most of its debt is senior unsecured debt issued by this entity although the issuer also has $750 million of outstanding ABS notes. Three Sprint entities also have roughly $10 billion of senior unsecured notes and more than $2 billion of secured debt (back by spectrum) outstanding. The company's maturity schedule runs from 2024-2062, and the maturity schedule is manageable given its healthy FCF generation and stable business model.
Recent Transactions: T-Mobile has undertaken several capital transactions since the transaction with Sprint closed in April 2020 for general corporate purposes including the refinancing of existing indebtedness, to improve the maturity profile by refinancing higher cost debt, for spectrum auction funding, and for shareholder returns. Collateral Release: In August 2022, the collateral for all liens under T-Mobile's secured credit agreement and senior secured notes were released. Additionally, the liens securing the obligations of Sprint Communications LLC as lessee under the intra-company spectrum lease agreement were also automatically released. As a result of all the liens being released, the obligations under the credit agreement, the senior notes and the spectrum lease agreement are senior unsecured obligations of the obligors including T-Mobile and TMUSA. The release did not affect the company's ratings.
Unsecured Debt Notching: In regards to the guarantor structure, Fitch believes T-Mobile USA's senior unsecured notes have a structurally superior position compared with the Sprint senior unsecured notes. T-Mobile USA's senior unsecured notes are guaranteed on an unsecured basis by T-Mobile and its wholly owned domestic restricted subsidiaries (including Sprint and its subsidiaries), subject to customary exception. Sprint senior unsecured notes do not benefit from a guarantee from T-Mobile operating subsidiaries, only from TMUSA and T-Mobile.
For the Sprint senior unsecured notes at Sprint LLC and Sprint Capital Corp., T-Mobile and TMUSA provide downstream unsecured guarantees. As such, Fitch notches down the Sprint senior unsecured notes by one notch to reflect the structural differences in the guarantees. Since the guarantor structure did not change in connection with the collateral release, the collateral release had no ratings impact on the Sprint senior unsecured notes.
Issuer Profile
T-Mobile is the second largest wireless communications provider in the U.S. with 118 million customers including 75 million postpaid phone subscribers. It has the largest 5G network coverage and an Ultra Capacity 5G network covering 300 million Americans.
T-MOBILE US 
