Fitch Rates T-Mobile's New Senior Unsecured Euro Notes 'BBB+'

Published: 2025-02-05 04:22:07 ET TMUS

Fitch Ratings assigned a 'BBB+' rating to T-Mobile USA, Inc.'s (TMUSA) new multi-tranche senior unsecured Euro notes issuance.

The Long-Term Issuer Default Ratings (IDRs) for T-Mobile US, Inc. (T-Mobile), TMUSA, and related entities remain 'BBB+'. The senior notes rank equally with TMUSA's other unsecured debt. The net proceeds will be used for general corporate purposes.

On Dec. 12, 2024, Fitch placed the ratings of 15 corporate entities, including T-Mobile, Under Criteria Observation (UCO) following the finalization of its 'Exposure Draft: Corporate Rating Criteria-Appendix 1: Leases'.

The UCO designation indicates potential rating changes due to the new criteria but does not imply a change in the underlying credit profile or affect existing Outlooks or Rating Watches. Fitch will review ratings placed on UCO within six months. The resolution of UCO may not result in changes for all ratings. For more details, visit: https://www.fitchratings.com/site/pr/10293870.

Key Rating Drivers

Strong Operating Momentum: T-Mobile continues to operate well in a competitive industry. Since the April 2020 Sprint acquisition, it materially improved its scale and earnings, with strong execution on merger integration. EBITDA was reported at nearly $32 billion in 2024 compared with Fitch's calculation of $12.2 billion in 2019. T-Mobile benefits from a growing subscriber base and its ability to drive pricing over time while maintaining its value leadership.

The company is expanding in areas such as fixed wireless access (FWA), smaller/rural markets (aided by the pending UScellular acquisition), and in capturing share among enterprise and government customers. Fiber investments through joint ventures and partnership investments could also enhance long-term results.

Healthy Balance Sheet: The company is committed to its investment-grade ratings and maintaining a strong balance sheet. Its 2.5x net leverage target positions the issuer fairly well at the IDR, alongside its competitive position and stable business model. EBITDA leverage was in the mid-2.0x range at YE 2024, consistent with the past couple of years, while EBITDAR leverage was in the mid-3.0x range. This is below the high-2.0x debt/EBITDA level it operated at following the 2020 Sprint merger.

EBITDA leverage could remain in the mid-2.0x range over the next few years, despite increased shareholder returns and business investments. Fitch also reviews leverage based on the (CFO less capex)/debt ratio, projected to be more than 20% in the near term, compared with 10% or lower from 2020-2022.

Leading 5G Network, Scaling Broadband: T-Mobile's solid 5G positioning is expected to drive earnings growth over the next several years. Its 5G network covers more than 330 million people, or nearly the entire U.S. population. Since mid-2020, T-Mobile gained considerable traction, adding more than 530,000 postpaid net phone subscribers quarterly (nearly 1.8 million net adds in 2H24). It has expanded its FWA offerings to 6.4 million customers as of YE 2024, compared with roughly 650,000 at YE 2021. T-Mobile aims to nearly double this subscriber base to 12 million FWA subscribers by YE 2028.

Balanced Capital Allocation: Fitch expects a balanced capital allocation within the context of its leverage targets, with excess cash invested in its business and returned to shareholders. T-Mobile materially increased its shareholder returns in the past two years and expects to spend up to $50 billion from Sept-2024 through YE 2027, a substantial rise from just $3.0 billion in 2022. T-Mobile is also materially increasing its inorganic spending, and plans to spend approximately $10.5 billion on announced acquisitions and joint ventures in 2025, which includes UScellular, Metronet, Lumos and Vistar deals.

Competitive Wireless Environment: The U.S. wireless market remains very competitive, but T-Mobile is firmly positioned as one of the three leading providers. Its strong spectrum position and high levels of capex create high barriers to entry for new competitors. The entry of cable companies into wireless services has intensified competition. Comcast Corp. (A-/Stable) and Charter Communications, Inc. (BB+/Stable) together have more than 17 million wireless subscribers, compared with 10.6 million as of YE 2022.

Parent-Subsidiary Linkage (PSL): Fitch applies PSL linkage between T-Mobile and its controlling shareholder Deutsche Telekom AG (DT; BBB+/Stable), but believes T-Mobile's standalone credit profile (SCP) is the same as its parent at 'BBB+'. T-Mobile contributes nearly two-thirds of DT's consolidated earnings. DT consolidates T-Mobile's financials, has voting control over approximately 58% of outstanding shares, and holds $1.5 billion of T-Mobile USA-issued debt maturing 2028. Fitch equalizes the IDRs for rated T-Mobile and Sprint entities due to strong legal, operational and strategic ties.

Unsecured Debt Notching: TMUSA's senior unsecured notes are structurally superior to the Sprint senior unsecured notes and are guaranteed by T-Mobile and its wholly owned domestic restricted subsidiaries, including Sprint and its subsidiaries. Sprint's senior unsecured notes are not guaranteed by T-Mobile subsidiaries, only by TMUSA and T-Mobile. For Sprint senior unsecured notes at Sprint LLC and Sprint Capital Corp., T-Mobile and TMUSA provide downstream unsecured guarantees. Fitch notches down the Sprint senior unsecured notes by one notch to reflect the structural differences.

Derivation Summary

T-Mobile has a strong competitive position relative to its primary competitors, Verizon Communications Inc. (A-/Stable) and AT&T Inc. (BBB+/Stable), as well as other cable and telecom peers. Fitch evaluates T-Mobile's ratings relative to its primary peers in the mobile segment, Verizon and AT&T, as well as a broader universe of rated peers in the telecom and cable industries. T-Mobile's wireless business has a similar wireless revenue scale to AT&T, with more postpaid and prepaid phone subscribers, but is smaller than Verizon.

T-Mobile is more concentrated than the other two national carriers, with most of its economics derived from mobile, and is materially smaller in terms of revenue and EBITDA. From a financial leverage perspective, T-Mobile is much better positioned than its peers that increased leverage in recent years to purchase wireless spectrum. However, Fitch expects leverage to decline at both AT&T and Verizon in the near term.

T-Mobile has a similar leverage profile to Comcast Corp. (A-/Stable), but is less diversified and smaller in terms of revenue and EBITDA. However, T-Mobile has higher EBITDA and FCF margins, and is projected to generate much stronger FCF in the next few years. T-Mobile is also rated favorably versus cable provider Charter Communications, Inc. (BB+/Stable), which has smaller revenue/EBITDA scale and materially higher EBITDA leverage.

Key Assumptions

Service revenue growth (postpaid and prepaid service revenue excluding wholesale) in the low- to mid-single digits over the forecast period, with stronger growth in 2025 due to the addition of Mint Mobile and UScellular's wireless operations;

EBITDA margins increasing to high 30% through 2027, supported by operating leverage from revenue growth, cost savings and further M&A synergies;

Cash taxes increase materially starting in 2025-2026, with Fitch estimating that the company uses most of its net operating losses by 2026;

Capex could be more than 10% of revenue through 2027, with $1.5 billion to $2.0 billion per year assumed for spectrum acquisitions;

Uses of cash are largely prioritized toward shareholder returns, with Fitch estimating share repurchases and dividends comprising a material use of cash flow each year through 2027. In 2025, the company will also use cash for M&A, including $600 million for Vistar, $950 million for its Lumos JV investment, $4.9 billion for its Metronet JV investment, and $4.4 billion for its acquisition of UScellular's operations, with roughly half of the amount as assumed debt;

EBITDAR leverage in the mid-3.0x range or EBITDA leverage in the mid-2.0x range over the forecast period.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

EBITDA leverage sustained above 2.75x or EBITDAR leverage above 3.75x;

Operating profit declines from greater-than-anticipated competition, or other operating/executional missteps could lead to negative action if a return to stability is uncertain.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch views a positive rating action as unlikely over the intermediate term reflecting current financial policy targets;

Demonstration of a consistent capital allocation policy while EBITDA leverage is sustained below 2.25x and EBITDAR leverage below 3.25x;

Improved operational performance exceeding Fitch's expectations for growth in subscribers, revenue, EBITDA and FCF generation;

--(CFO less capex)/debt sustained at the upper-teen range or higher;

Broader business diversification beyond wireless services.

Liquidity and Debt Structure

T-Mobile's liquidity is strong, supported by $5.4 billion of cash at Dec. 2024, an untapped $7.5 billion revolving credit facility, an unsecured commercial paper program with capacity of up to $2.0 billion, and post-dividend FCF that was nearly $14 billion in 2024. Management projects pre-dividend FCF of $17.3 billion-$18.0 billion in 2025. T-Mobile has meaningful capital market access, further supporting liquidity.

T-Mobile is an established investment-grade issuer and has diversified its financing mix since its 2020 Sprint merger. As of December 2024, reported debt was approximately $78.3 billion, excluding finance lease liabilities, majority of which was in senior unsecured notes. T-Mobile USA, Inc. is the primary debt issuer. Its maturity schedule, running from 2025 to 2062, is manageable given its healthy FCF generation and stable business model.

Collateral Release: In August 2022, upon achieving certain investment-grade ratings, the collateral for all liens under T-Mobile's secured credit agreement and senior secured notes were released. The liens securing the obligations of Sprint Communications LLC as lessee under the intracompany spectrum lease agreement were also automatically released.

Following the release of all the liens, 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.

Issuer Profile

T-Mobile is the third-largest U.S. telecom provider and second-largest wireless provider. Founded in 1994, it is majority owned by German telecom provider Deutsche Telekom AG. It trades on the Nasdaq under the ticker TMUS.

Date of Relevant Committee

11 December 2024

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.

Public Ratings with Credit Linkage to other ratings

The company's rating is dependent on that of Deutsche Telekom AG.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.