MetroPCS Communications executive calls debt ratios 'conservative'

By Paul Deckelman

New York, March 27 - MetroPCS Communications Inc. increased its debt load by nearly $1 billion last year, but the Dallas-based pre-paid wireless service provider says it was worth it. The increase gives the company an ample cache of cash in order to buy additional wireless spectrum space that comes available - something its treasurer and vice president for finance called "the lifeblood of a wireless company."

Keith D. Terreri told participants at the Barclays Capital High Yield and Syndicated Loan Conference in Phoenix on Tuesday that "the balance sheet is in a good position to take advantage of opportunistic spectrum acquisitions as we move forward here."

Bank loan deals swell debt

At the end of 2011, the company's total debt stood at $4.75 billion, up from $3.78 billion at the end of 2010 and from $3.65 billion at the end of 2009.

That debt consisted, in part, of $1 billion each of 7 7/8% senior notes due 2018 and 6 5/8% senior notes due 2020 that MetroPCS sold in 2010. It used the proceeds to take out the $1.95 billion of 9¼% notes senior notes due 2014 that were outstanding at that time.

There was also $2.47 billion of senior secured credit facility debt, up from $1.53 billion at the end of 2010.

The company was involved in two bank-debt transactions last year. In March 2011, the company obtained a $500 million term loan B-3 due 2018 priced at 375 basis points over Libor, with no floor. The transaction was reduced from an originally shopped $1.5 billion.

It returned to the capital markets in May 2011 with a new $1 billion add-on to the March loan. The add-on was upsized from an originally shopped $600 million.

Terreri noted that the proceeds from the two loan tranches - largely unspent except for the portion used to repay the company's existing term loan B-1 due 2013 - are still carried on its balance sheet under cash and equivalents, which, along with short-term investments, swelled to $2.24 billion at the end of 2011, almost double the $1.17 billion recorded at the end of 2010.

"From a cash perspective, we really need to maintain anywhere from $500 million to $700 million on the balance sheet to run the company from a working capital perspective. So that gives us anywhere from $1 billion to $1.5 billion to spend on spectrum," the MetroPCS executive declared.

Leverage ratios below 4 times

The company maintains "very conservative [leverage] ratios," he said. "We really want to run between 3 times and 4 times" total debt and net debt, respectively, versus 12-month adjusted EBITDA.

At the end of 2011, the ratio of total debt to adjusted EBITDA stood at 3.6 times. This was up from 3.2 times at the close of 2010 but down from 3.8 times at the end of 2009, helped by a sizable EBITDA increase in the subsequent two years. EBITDA increased from $956 million in 2009 to $1.33 billion in 2011.

On a basis of net debt versus adjusted EBITDA, the leverage ratio fell to 1.9 times at the end of 2011 from 2.2 times at the end of 2010 and 2.6 times at the end of 2009. The decrease was helped by the big gain in cash in 2011 as a result of the financing deals.

However, Terreri acknowledged that "obviously, if we were to purchase some additional spectrum, the net debt would approach the total debt to adjusted EBITDA."

Tight with a buck

MetroPCS is a leading provider of pre-paid wireless services for which no monthly contract is involved, a business that Terreri called "the fastest-growing segment in wireless." He said the company has been careful to maintain tight cost discipline, including eschewing expensive national advertising used by larger wireless rivals like Sprint Nextel Corp., AT&T Corp. and Verizon Communications. MetroPCS prefers less-expensive local advertising.

He also said the company conserves its cash by not subsidizing the purchase of smartphone handsets for its customers like the bigger carriers routinely do.

He said the company generated about $1.3 billion of EBITDA over the 12 months of 2011 on a run-rate basis, and its unleveraged free cash flow for the year was just over $440 million. "So," he said, there's "significant EBITDA and cash flow coming out of the operations."

During the question-and-answer portion of the program following his formal presentation, Terreri was asked about possible consolidation in the wireless space, and he said that it was "inevitable" and that his company was constantly evaluating its options.

However, there was no specific mention, either from Terreri or from any of the questioners, of the persistent market belief that MetroPCS and pre-paid wireless sector peer Leap Wireless International Inc. might merge. MetroPCS made an offer for San Diego-based Leap - the parent of Cricket Communications Inc. - back in September 2007, although it withdrew that bid just two months later and has not revisited the idea since.

Nonetheless, analysts continue to speculate that such a combination would make sense, and such theorizing periodically drives Leap's stock and junk bonds higher, if only temporarily.

Terreri said that "our No. 1 strategic focus is obtaining spectrum."

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