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The Deal: Crown Castle's Lead on Tower Deal May Rest on REIT

Moody's Investors Service analyst Gregory Fraser suggested that the timing of Crown Castle's announcement, just days after American Tower's latest deal, was not coincidental.

"Because American Tower is issuing a significant amount of debt to make this purchase, it has no more flexibility to make another large acquisition," he said. "With American Tower out of the running for a big acquisition, this means Crown will have a better chance of acquiring AT&T's towers."

American Tower touted its investment-grade balance sheet when it announced the deal for Global Tower, saying that its liquidity was one reason its bid prevailed.

Crown Castle, on the other hand, is speculative grade.

That could present problems when it comes to its REIT structure and financing something as big as the AT&T purchase.

"With rising interest rates, balance sheet matters more than ever, particularly with strategic activities," said EA Markets LLC co-founder Reuben Daniels, who advised American Tower on the Global Tower Partners deal. The New York investment bank, which is not part of a lending institution, advises clients on matters related to capital structure.

"There is a view today that money is cheap and will be plentiful for years to come," he said. "Once the tide of liquidity is withdrawn from the system, to paraphrase Warren Buffett, 'that's when you find out who is swimming naked.'/"

An investment-grade rating is "really important for a REIT," he said. The combination of high leverage and cash flow distribution requirements of a REIT can create "capital allocation hurdles," he said, noting that there are not many examples of low BB rated REITs.

"You can't do everything," Daniels explained. "A REIT conversion can change a company's priority of cash flow allocations for dividends, debt reduction, share repurchase, capital expenditure or acquisitions." If access to capital is reduced, management's ability to make capital allocation decisions can be "severely constrained."

Steven Marks of Fitch Ratings Inc. said that most of the REITs that his company rates are investment grade.

"There are a few reasons why that is," he explained, including that commercial real estate is an asset that can support leverage and most REITs have access to mortgages. They tend to access the bond market because they want to, not because they have to.

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