As the country copes with a surge in COVID-19 cases and a sinking stock market, S&P Global Ratings believes U.S. telecom and cable issuers are well-positioned for the most part to withstand the near-term effects with limited impact to credit quality, given their recurring, subscription-based business models. That said, we have identified a handful of companies that have exposure to vulnerable sectors such as transportation and tourism, which could hurt their financial and operating performance in the near-term.

The larger concern among telecom and cable providers is the U.S. economy slipping into prolonged recession. Many of these operators have elevated leverage, which gives them limited cushion in the event of an economic downturn. In 2019, there were 22 downgrades and only six upgrades, following a similar trend in 2018. Further, downgrades were solely in the 'B' and 'CCC' category, meaning that many of these companies will be vulnerable to refinancing risk if credit market conditions continue to deteriorate.

Chart 1

U.S. Telecom And Cable Providers Are Well Positioned In The Near-Term, Providing Creditors With A Degree Of Comfort

Wireless

Mobile devices have become a necessity for most people and consumers are unlikely to rid themselves of wireless services if the COVID-19 virus spreads as they are more likely to remain home and use these devices for data and streaming videos. In some cases, they will use their smartphones for work applications as well.

That said, the likelihood of store closures (T-Mobile US Inc. recently announced they would close 80% of their footprint) could result in lower gross and net customer additions but also reduced churn. Additionally, supplier disruptions for devices could pressure equipment revenue although this could help profitability since revenue from equipment sales is very low margin.

If the virus causes an extended economic downturn, much of the postpaid subscriber growth over the past couple of years could reverse itself, especially as companies reduce headcount to preserve margins, since a large portion of postpaid customer growth has come from the proliferation of second handsets as enterprises distribute smartphones and tablets to their employees for work.

Cable

We do not expect the COVID-19 pandemic to have a material effect on most cable providers' operating performance. In fact, it is possible that fear of the virus could lead to increased demand for home broadband if outdoor events are cancelled and people become reluctant to travel. Video cord-cutting could also slow modestly if people are more inclined to keep their traditional video service to stay up to date with a variety of live news sources. Advertising revenue only accounts for a small portion of total revenue for most cable distributors but we expect the coronavirus to have a more negative impact if local advertisers are selling less, although higher ratings from increasing TV viewership could partly offset this impact. If the pandemic results in a more protracted economic downturn, revenue from small and mid-sized businesses (SMB) could be affected as these customers may downsize or even go out of business.

Wireline

While cable has a dominant share of the broadband market, consumer high-speed data revenue for wireline companies that have deployed fiber should also benefit from people staying at home, although the spread of the coronavirus would not likely drive market share gains. That said, wireline companies with exposure to business customers could feel the effect of a prolonged economic downturn driven by the COVID-19 as SMB customers may discontinue operations, while larger enterprise customers could cut telecom spending and migrate to less expensive cloud-based networking technologies such as SD-WAN. We believe issuers that have a large exposure to business customers, such as CenturyLink Inc., which derives about three-quarters of its revenue from commercial customers, could experience sharper declines in revenue if this were to occur. However, we believe CenturyLink also benefits from a diverse business customer base. Similarly, both AT&T and Verizon Communications Inc. have revenue from business customers, although their exposure is much less, at about 14% and 11%, respectively.

Data Centers

We believe underlying demand for data centers continues to be robust irrespective of COVID-19. With more consumers staying home, bandwidth usage could rise based on higher Internet usage and elevated demand for telecommuting and remote conferencing apps. However, we have identified several potential impacts from a recessionary scenario:

• The biggest risk is that SMB customers go out of business and increase customer churn. Operators with significant SMB exposure include Flexential Corp. , Cequel Data Centers L.P., Internap Corp., Cyxtera DC Holdings Inc., and DataBridge Parent Inc.
• Potential SMB customers could be reluctant to migrate to a third-party data center to avoid incurring upfront costs associated with moving equipment, which could slow the pace of growth. On the other hand, the pace of IT outsourcing could accelerate as potential clients seek to improve operating efficiency by adopting hybrid cloud solutions.
• The supply chain could be disrupted either in the data center construction equipment or server market, which could impact the pace of data center development or the timing of customers signing data center leases. However, data center construction equipment is typically secured with long lead times for upcoming builds.

Low Speculative Grade Issuers Do Not Have Meaningful Near-Term Maturities

Although the U.S. telecom and cable sectors held up well during the 2008 financial crisis, they could be less resilient as the economy slips into another recession given more mature industry conditions, changes in consumption habits, and technology shifts (e.g., migration to the cloud from legacy networking solutions and online video streaming services from linear video). Furthermore, these issuers carry more leverage than they did in 2008 because of mergers and acquisitions (M&A) and aggressive spending, driven by a decade of historically low borrowing costs. As capital market conditions weaken, companies at the lower end of the rating spectrum could struggle to refinance looming maturities. Already, Frontier Communications Corp. announced that it has elected to defer interest payments due on March 16, 2020, on certain senior unsecured notes and entered a 60-day grace period as it continues discussions with bondholders regarding its capital structure. Similarly, data center operator Internap Corp. entered into a restructuring support agreement with an ad hoc lender group and will file for Chapter 11 bankruptcy.

That said, we believe U.S. telecom and cable providers are well positioned overall to withstand a credit crunch in the near-term. Taking advantage of strong credit markets, most low-speculative-grade issuers have pushed out debt maturities to 2023 and beyond. A handful of these companies have debt maturities in 2020 and 2021, although most are already in the 'CCC' category, while the remaining issuers have sufficient liquidity to repay upcoming debt obligations when they come due, in our view. DISH Network Corp., for example, had $1.4 billion of cash and equivalents as of Dec. 31, 2019 (net of $1.4 billion it needs to pay for the acquired wireless business) to address $1.1 billion of debt that is due in 2020. Further, with about $1 billion of annual free operating cash flow (FOCF) and another $7 billion of secured debt capacity, it should be able to repay or refinance its $2 billion of debt that comes due in 2021, even if it is unable to access the bond markets.

Five of these issuers also have revolving credit facilities maturing in 2020 and 2021. Similar to other wireline companies, Consolidated Communications Holdings Inc. has been mired in secular industry declines and has fallen out of favor in the capital markets, as evidenced by debt trading levels. The company is trying to reduce its leverage to 4x by the end of 2020 from 4.3x at year-end 2019 through cost saving initiatives with the goal of refinancing its capital structure by mid-2021. However, it may find it difficult to refinance or extend its $110 million senior secured revolver due 2021 as well as other upcoming debt maturities, which includes $472 million of senior notes due in 2022, if capital market conditions continue to deteriorate. That said, even if they are unable to refinance or extend the revolving credit facility, the company generated about $107 million of FOCF, which it expects will improve in 2020. As such, we believe it has sufficient liquidity even without the revolver. Similarly, TNS Inc. had about $22 million of cash on hand as of Sept. 30, 2019, and generates around $20 million-$30 million of FOCF. So, while its $50 million revolver matures this year, we believe it has adequate liquidity even without the facility.

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Issuers That Have Direct Exposure To COVID-19

Of the six rated North American satellite service providers and operators, we believe Gogo Inc.'s (CCC+/CreditWatch Negative/--) earnings and cash flow will be hurt the most because it has the greatest exposure to commercial air travel of the peer group, although ORBCOMM Inc. (B/Stable/--), Global Eagle Entertainment Inc. (CCC/Developing/--), and Viasat Inc. (BB-/Stable/--) are all also likely to experience weaker demand from a prolonged COVID-19 outbreak. This is because these companies provide satellite services to the commercial aviation, transportation, and cruise markets, which are directly correlated with commercial travel and macroeconomic conditions.

There continues to be a high degree of uncertainty about the rate of spread and timing of the peak of the COVID-19 disease, but we now forecast a global recession in 2020, with GDP rising just 1.0%-1.5%. This is against the backdrop of volatile markets and growing credit stress, with risks that remain firmly on the downside. In the U.S. the impact of COVID-19 has escalated rapidly, with restrictions following Europe with a shortening lag. Owing to the strong start of the year, it looks like the U.S. will post marginally negative growth in the first quarter, with the big hit coming in the second quarter before recovery begins in the second half of the year as laid out in the report "COVID-19 Macroeconomic Update: The Global Recession Is Here And Now," March 17, 2020.

Gogo most directly impacted

We have placed our ratings on Gogo on CreditWatch with negative implications because the company does not have sufficient liquidity cushion to absorb a significant and prolonged cut to global air travel. The company's commercial service revenue (about 50% of total) is highly correlated with passenger in-flight WiFi usage and its cost structure is largely fixed, which will result in significantly lower cash flow from reduced passenger volume. Additionally, the CreditWatch reflects the very high level of uncertainty regarding the duration and impact the coronavirus pandemic poses to commercial airline passenger volumes in 2020, as discussed in our report titled "Coronavirus' Global Spread Poses More Serious Challenges For Airlines," published March 12, 2020.

The company had $170 million of cash at Dec. 31, 2019, and has a modest $30 million asset-backed (ABL) revolver, but we projected a cash burn of about $70 million in 2020 before the impact of the virus. While there are temporary measures the company can take to preserve liquidity, the magnitude of the cash impact from the virus is unclear at this point. The company's next maturity is 2022 but under a stress scenario its cash could be depleted before then, and we believe access to capital is limited.

Gogo is reliant on growing its international segment to reduce leverage and generate positive cash flow levels ahead of its next maturity in 2022. While we believe a protracted outbreak would have a greater impact on international commercial aviation (12% total revenue) than North America (37%), domestic travel could also be significantly impaired. Importantly for Gogo, roughly 50% of their revenue and the vast majority of EBITDA is derived from private jets, which we believe will be less impacted by coronavirus because of the fixed, long-term nature of most of these contracts, and because private jet travel tends to shield travelers from commercial terminals and public cabins.

We have modified our base-case forecast for Gogo downward to reflect evolving conditions. We think COVID-19 will be a material headwind to EBITDA growth in the near term for Gogo but the impact will be limited to 2020. We assume the first quarter results will be moderately affected by the virus, but some airlines may remain profitable. The second quarter will be the most difficult one, with heavy losses. The third quarter will likely see a slow recovery, and the fourth quarter will approach normal conditions. The outlook for the second half of 2020 is the most difficult to judge, and recovery could be slower or more rapid than we assume.

Our revised base-case assumes the following:

• Revenue declines of 4%-8% in 2020 but grows 10%-15% in 2021.
• EBITDA falls 15%-20% as higher-margin service revenue is disproportionately lower than lower-margin equipment revenue, with 30%-40% growth in 2021.
• A FOCF deficit of $100 million in 2020 before approaching break-even levels in 2021.

Under this scenario, we believe Gogo has enough liquidity cushion to absorb the temporary shock before rebounding in 2021. However, we believe the company will need to demonstrate a path toward positive cash flow in order to access capital markets to refinance its $238 million convertible notes that come due in 2022. If Gogo is not able to refinance the 2022 convertible notes prior to Dec. 15, 2021, the undrawn (as of Dec. 31, 2019) ABL facility's maturity date gets pulled up to Dec. 16, 2021. These risks are encapsulated in the current 'CCC+' rating.

However, we also recognize that the broad and unpredictable spread of the new coronavirus differs from more geographically contained outbreaks, such as SARS. We believe risks remain to the downside, given uncertainty about when the crisis will peak and whether the epidemic persists beyond second quarter 2020 or escalates more quickly. The International Air Transport Association (IATA; a global airline industry trade group) notes that previous disease outbreaks have peaked after one to three months and recovered to pre-outbreak levels in six to seven months. However, given the global impact this crisis has already had, we think that traffic could take longer to recover in this unprecedented case. If the epidemic is prolonged or precipitates a recession that causes commercial travel to be impacted throughout 2020, our stress scenario includes:

• Revenue down 10%-15% in 2020
• EBITDA declines of 35%-40%
• A FOCF deficit of about $150 million in 2020

Therefore, in a stressed scenario, we could take further negative rating actions as the company's liquidity and cash flow trajectory declines throughout the year.

Chart 2

Global Eagle is better positioned than Gogo but still has exposure

Global Eagle could also be hurt by a prolonged impact to travel as a result of COVID-19, which would put added pressure on the company's liquidity position, which has limited cushion for further disruptions. However, there are two factors that we believe better position Global Eagle to withstand a more stressed scenario compared to Gogo.

• Global Eagle's commercial aviation and cruise contracts are more fixed in nature, with less revenue variability from a potential dip in passenger volumes. For commercial air connectivity, we believe that north of 90% of revenue is from fixed, monthly charges as long as the aircraft remains connected to Global Eagle's network. As a result, even in a stressed scenario throughout 2020, we find it unlikely airlines choose to discontinue service.
• Global Eagle is less exposed to international commercial aviation connectivity (we believe less than 5% of total revenue) than Gogo with a large portion of its connectivity revenue coming from its largest customer, Southwest Airlines Co. (18% of total revenue), which is a predominantly domestic airline. While international capacity cuts have been more extreme than domestic, Southwest recently announced that it will be cutting capacity by at least 20% through June, which is substantial.

Global Eagle also generates roughly 25% of its revenue from its Maritime, Enterprise, and Government (MEG) business (included across all reported segments). Roughly 40% of MEG revenues, or 10% of consolidated revenue, come from the cruise industry. We believe that while the cruise industry is heavily exposed, roughly 75% of Global Eagle's contracts with the cruise lines are fixed (similar to Global Eagle's airline contracts) as the cruise lines lock in their satellite capacity, with the remainder being a revenue share with the cruise lines based on usage. Therefore, we estimate that only the revenue-share portion is exposed to significantly lower passenger volumes, representing only about 2%-3% of total revenue. Still, we believe its possible Global Eagle may be forced to restructure some contracts, putting additional pressure on the company's liquidity.

Importantly, we do not believe the remaining 60% of MEG revenues, generated from government services and yachts, will likely be as impacted by the outbreak because contracts are predominantly fixed, yacht owners are less price sensitive, and these passengers can more easily isolate themselves. However, if the virus is prolonged and wealthy consumers reduce travel, they may seek to pause subscriptions.

Global Eagle's third business unit is its global media and content business (about 45% of revenue), which is predominantly focused outside of North America, and is more exposed to potential impact to international air traffic volumes although contracts are typically 3-5 years. A large portion of the company's contracts are pass-through deals in which EBITDA should not be materially affected by lower volumes. These deals are structured with Global Eagle earning a fixed management fee so while revenue may be lower from less pay-per-view releases, overall profits should hold up well. Still, the company does have margin-based contracts as well, which could hurt EBITDA modestly as we believe there is greater potential for usage-based revenue variability. The offset is that the company has some control over which content is provided, enabling some cost flexibility.

Our base-case for Global Eagle now contemplates a moderate cash impact from COVID-19, largely mitigated by the fixed nature of a large portion of the contracts. We now expect negative FOCF of $10 million to $20 million in 2020 compared with previous expectations of roughly break-even. While we believe the company's roughly $70 million of available liquidity (as of Sept. 31, 2019) provides good runway, it is noteworthy that roughly $60 million is derived from revolver availability and covenant compliance could become tight if forecasted EBITDA falls by more than 10%. Therefore, in a prolonged stress scenario, it could be challenging for the company to refinance before the revolver comes due in January 2022, particularly if uncertainty in the market persists, resulting in limited access to external funding or significantly increased cost of borrowing.

Issuers With Direct Exposure To COVID-19 But Cushion At The Current Ratings

AT&T Inc. and Comcast Corp. have large media operations

While telecom or cable services make up a large portion of their revenue base, both AT&T (BBB/Stable/A-2) and Comcast (A-/Stable/-A-2) have exposure to segments that are more vulnerable to the spreading COVID-19 pandemic and economic fluctuations. In particular, revenue from theme parks and film will drop precipitously in the near-term because of the COVID-19 virus due to park and theater closures. Advertising revenue is also likely to come under pressure as consumers scale back their spending and companies pull back their marketing plans in response, although the duration of the economic impact of is still uncertain.

Due to its acquisition of Warner Media, AT&T now derives about 19% of its revenue from media services, although only 4% of AT&T's total revenue comes from advertising and another 3% from film. Warner Media's Turner segment derives a large portion of its advertising revenue from the NCAA tournament and the NBA. The cancellation of the tournament and suspension of the NBA season will likely have a significant impact on Turner's advertising revenue this year, although the overall impact on AT&T's total revenue should be more muted.

For Comcast, about 12% of its consolidated revenue comes from theme parks and film while another 13% comes from advertising. The company's Osaka theme park has been closed for two weeks and the company expects a 7%-9% decline in EBITDA at the NBCU level (about 2% of overall EBITDA) for the first quarter of 2020, depending on how long the park is closed. However, the impact to NBCU's operating metrics will be far worse from the closure at Comcast's two U.S. parks, in Orlando, Fl., and Hollywood, Calif.

Despite our expectation for material declines in revenues, earnings, and cash flow at NBCU, which could temporarily push Comcast's leverage above our 3x downside threshold for the rating, we expect the company's steady cable operations to continue to support the 'A-' issuer-credit rating. Longer-term, a sharp decline in advertising, filmed entertainment, and theme park revenue in a stressed scenario could have a more pronounced impact on the company's credit measures although this is not currently incorporated into our base-case forecast.

Viasat benefits from diversity

Viasat is less likely to see ratings pressure due to the COVID-19 outbreak because the majority of its revenue is derived from government, in-home broadband, and equipment revenue, which shouldn't be materially impacted. While Viasat is exposed to the commercial aviation segment (roughly 12% of consolidated revenue), we believe that even under a stress scenario, leverage would remain below our downgrade trigger, as there is currently over 1x leverage cushion. Further, while Viasat is in a heavy growth phase as it spends to complete its Viasat-3 program, we believe they have adequate liquidity (with $590 million available on the revolver as of Sept. 30 2019) to withstand a more stressed scenario that temporarily impairs its ability to raise capital.

ORBCOMM likely to feel impact of recession

ORBCOMM is also less likely than Gogo or Global Eagle to see ratings pressure as a result of a prolonged outbreak because there is sufficient leverage cushion (>1x) at the current rating level relative to our downgrade threshold and the company does not have direct exposure to the airline or cruise industries. However, much of its EBITDA has direct ties to general economic activity as approximately 50% of the company's revenue comes from trucking and about 12% from shipping, which are both directly correlated with GDP so we do anticipate there will be a negative impact to cash flow relative to our previous forecast. However, there is also ongoing downside risk to our GDP forecast and as a result, that cushion could decline.

We believe ORBCOMM has a degree of protection from economic fluctuations in that roughly 25% of the total revenue is related to refrigerated goods, which is less sensitive to economic cycles and international trade. Additionally, the majority of the service contracts are predominantly fixed in nature. Still, there is some variability based on usage, which may be impacted by a slowdown in consumer spending that leads to fewer trucks on the road. We believe greater risk remains on the product side. While product accounts for about 25% of EBITDA, we believe deliveries of new trucks to be highly sensitive to economic conditions, despite potentially long lead times.

We have modified our base-case downward to reflect updated S&P Global macroeconomic forecasts including:

• Global GDP growth of 1.0%-1.5% in 2020 versus 1.9% pre-virus
• U.S. GDP of (0.5%)–0.0% in 2020, which includes a seasonally adjusted contraction of 6% in the second quarter of 2020. The fed has already acted and we expect a targeted fiscal stimulus at the federal level soon.
• A rebound in the second half of the year as consumers release pent-up demand and firms rush to fill up back orders and re-stock inventories. Still, there will be some permanently lost economic activity, such as consumers' discretionary spending and suppliers' capacity to meet demand.

However, if the duration of the pandemic extends beyond the second quarter, the economic impact to GDP, and ORBCOMM, could be much larger. This could cause a downgrade if leverage increases above 5.5x due to slowing subscriber growth, declining average revenue per user (ARPU), and lower product sales. We believe these factors would most likely cause mid-single digit revenue declines, and margins deteriorating by more than 300 basis points (bps) from hardware discounts and/or lower volumes as a result of the virus. Accordingly, we could revise the outlook to negative or lower the rating if such a scenario becomes more likely.

AP TeleGuam Holdings Inc. derives revenue from tourism

AP Teleguam (d/b/a GTA) is a quadruple-play telecommunications provider on the island of Guam. While its performance has been solid of late, the company is somewhat dependent on the tourism industry in Guam, which has been hurt in recent months by a lower number of visitors from South Korea and Japan due to the pandemic. Through February 2020, total tourist cancellations are over 15,000 since the start of the outbreak. Meanwhile, tourist arrivals during February declined about 15%, compared to growth of about 7% in January according to the Guam Visitors Bureau. Approximately 35% of the island's workers support its tourism industry. Despite its wireless and broadband operations, we expect GTA's operating and financial performance will be hurt by COVID-19 and its impact on the global economy given Guam's link to tourism, especially from the Asia-Pacific region. While the company's low leverage provides some cushion, its small scale and high degree of fixed costs could have a pronounced impact on EBITDA if revenue drops for an extended period. We would expect most of the direct impact to be on revenue from usage-based roaming service, daily and monthly pre-paid wireless service, and on revenue from its trans-Pacific cable landing station due to project delays.

As a result, we have adjusted our base-case forecast downward. For 2020, we now expect wireless revenue to decline around 5% due to lower roaming and prepaid revenue, and more modest cable landing station revenue growth of below 10%, before revenue from these segments rebounds in 2021, depending on the extent of the travel-related downturn. We also expect total EBITDA to fall around 13%-15% this year, resulting in leverage rising to the low-4x area from about 3.6x at year-end 2019. We would expect further pressure on revenue and EBITDA if the local economy were to slip into a recession.

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