Weakened industry fundamentals in the wireless sector continue to affect Dobson Communications Corp., said Rosemarie Kalinowski, a Standard & Poor's analyst. There continues to be declines in roaming yield. Roaming revenues account for 30% of overall revenues and are derived from Dobson providing service to subscribers of other wireless providers when those customers use Dobson systems to carry their calls. Also, competition risk looms, particularly from national carriers, when number portability comes into effect in the top 100 metropolitan areas in November. Number portability will allow cellular customers to change service providers without switching phone numbers.
These factors are incorporated into S&P's recent assignment of a B- to Dobson Cellular System's (DCS) $550 million term loan and $150 million revolver and a CCC+ to Dobson's $600 million senior notes. DCS is a subsidiary of Dobson.
The industry trends weighing on the credit are mitigated by Dobson's above-average EBITDA margins of 49% and efforts to reduce overall costs, Kalinowski noted. In addition, churn rates are better-than-average at Dobson and its fully-owned and unrestricted subsidiary, American Cellular Corp. The risk associated with the company's large roaming dependency is further allayed by long-term roaming agreements with AT&T Wireless Services and Cingular Wireless to cover global systems for mobile communication traffic, which limits near-term competitive threats. Dobson's capital expenditures are expected to peak between $135-145 million in 2003 and American Cellular's capital expenditure is anticipated to be around $85-105 million, with a large portion of this requirement directed to network upgrades associated with its major roaming contracts.
Dobson is working toward a recapitalization, which will include the merger of Dobson/Sygnet Communications and its subsidiaries into DCS. Proceeds from the new debt will be used to refinance approximately $751 million of outstanding debt under the Dobson Operating Company and the Dobson/Sygnet credit facilities, to tender 121/4% Sygnet senior notes, and tender 121/4% exchangeable preferred stock. The recapitalization will reduce overall debt, said Kalinowski, adding that the recap will also improve the company's overall liquidity for the 2004-2008 timeframe. S&P expects the combined Dobson and American Cellular entity to continue to be cash-flow positive even as the company works to complete its network upgrades. Leverage is expected to be 4.5 times. Warren Henry, v.p. of Dobson's investor relations, did not return calls.
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