Tower debt is sized on EBITDA and tested on covenants, and both look comfortable. The binding constraint is the cash left after the owner buys the land under its towers.
Tower debt is sized as a multiple of EBITDA and then tested against a leverage covenant and an interest cover covenant, whichever bites first. On an illustrative 850-tower portfolio with 13.155 million of year-1 EBITDA, a 7.0x loan is 92.08 million; an 8.5x leverage covenant caps it at 111.8 and a 1.75x interest cover at 6.25 per cent at 120.3, so leverage binds, and EBITDA can fall 17.6 per cent before a breach. What 7.0x cannot do is pay its own interest after ground lease buyouts in year one.
Worked in full in The Digital Infrastructure Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Towers carry more debt per unit of EBITDA than almost any other infrastructure, because their revenue is contracted for years with fixed escalators, the capex to keep them standing is small, and every new tenant on an existing tower is almost pure margin. That makes the leverage multiple look conservative and the interest cover comfortable. The constraint usually sits somewhere else: in the cash the portfolio actually has left once the owner starts buying the land under its towers.
| Input | Value |
|---|---|
| Towers / colocation tenancies at purchase (tenancy ratio 1.45) | 850 / 382 |
| Anchor rent per tower / colocation rent per tenancy, $ a month | 2,050 / 1,750 |
| Towers on leased land / ground rent per site, $ a month | 595 / 1,150 |
| Ground lease buyouts a year, at 16 years of rent | 40 |
| Price, $ millions | 282.0 |
| Acquisition debt / interest rate, interest only | 7.0x / 6.25% |
| Covenants: maximum leverage / minimum interest cover | 8.5x / 1.75x |
1. Year-1 EBITDA. Revenue of 29.16 million (anchor 20.91, colocation 8.25) less ground rent of 7.935, site costs of 3.57 and overhead of 4.5 gives 13.155.
2. Size and test.
Debt = 7.0 × 13.155 = 92.08; interest = 92.08 × 6.25% = 5.755; interest cover = 2.29x
Ceiling from leverage covenant = 8.5 × 13.155 = 111.8
Ceiling from interest cover = 13.155 ÷ (1.75 × 6.25%) = 120.3
Excel: =MIN(CovLev*EBITDA, EBITDA/(CovICR*Rate))
At 6.25 per cent, interest cover only binds above 9.14x, so the leverage covenant is the real ceiling. At 7.0x against 8.5x, the headroom is 1 − 7.0 ÷ 8.5 = 17.6 per cent of EBITDA, or 2.32 million. Interest cover would need a 23.4 per cent fall.
3. Translate the headroom into tenants. A colocation tenancy pays 21,000 a year at almost full margin, so 2.32 million is about 110.5 tenancies, 29 per cent of the 382 the portfolio started with. A merger of two mobile operators that decommissions 60 of them removes 1.26 million of revenue, 9.6 per cent of EBITDA, and takes leverage to 7.74x: inside the covenant, but with most of the headroom used. That scenario is worked in how a carrier merger hits cell tower returns.
4. Test the cash, not just the ratios.
EBITDA 13.155 − maintenance 1.02 − strengthening for new tenants 0.383 = 11.75 before buyouts
Less ground lease buyouts 8.832 = free cash flow 2.92
Interest 5.755: covered 2.04x before buyouts, 0.51x after; the equity funds 2.84
The 7.0x loan passes both covenants with room to spare and still leaves the equity writing a cheque in year one. That is not a sign of over-leverage: the buyouts are discretionary, they convert a rising ground rent into owned land, and they lift EBITDA every year they are made. But it does mean the debt is serviced by growth. With debt held flat, leverage falls to 6.35x in year 2, 5.79x in year 3 and 4.14x by year 7, when EBITDA of 22.232 supports a refinancing at 7.0x of 155.62.
| Leverage | Debt | Equity | Interest | Interest cover | EBITDA fall to 8.5x | Year-1 cash after buyouts and interest |
|---|---|---|---|---|---|---|
| 5.0x | 65.8 | 222.5 | 4.11 | 3.20x | 41.2% | −1.19 |
| 6.0x | 78.9 | 209.5 | 4.93 | 2.67x | 29.4% | −2.01 |
| 7.0x | 92.1 | 196.5 | 5.76 | 2.29x | 17.6% | −2.84 |
| 8.0x | 105.2 | 183.5 | 6.58 | 2.00x | 5.9% | −3.66 |
| 8.5x | 111.8 | 176.9 | 6.99 | 1.88x | 0.0% | −4.07 |
Even at 5.0x the year-1 cash is negative: after the 8.832 buyout programme, free cash flow is only 2.92, less than the 4.11 of interest at that multiple. Each extra turn of leverage adds about 13 million of debt and costs about 12 points of covenant headroom. At 8.0x, a single merger like the one above would breach.
Price is 21.4 times year-1 EBITDA, so 7.0x of debt is only 32.7 per cent of the purchase price. Tower leverage looks high against EBITDA and low against value; the covenant is written against EBITDA, so that is the side to watch.
Reading interest cover as debt service capacity. A 2.29x cover on EBITDA looks safe, but EBITDA is before maintenance, strengthening and buyouts; on free cash flow after buyouts the cover is 0.51x. If the owner has to stop the buyouts to pay interest, ground rent keeps escalating at 3 per cent a year and margins drift down. Size on EBITDA, as the market does, but run the cash test beside it, and decide in advance how much of the buyout programme the equity will fund.
The ten-year model with the debt, the refinancing and the covenants is in the free workbook for this case; the price side of the same portfolio is in what EBITDA multiple to pay for cell towers.
High multiples of EBITDA because revenue is contracted with escalators and capex is low. On the illustrative portfolio, 7.0x year-1 EBITDA of 13.155 million is 92.08 million of debt, yet only 32.7 per cent of a 282.0 million price paid at 21.4 times EBITDA. The covenant, 8.5x here, is written against EBITDA, so that is the ratio that limits it.
One minus the drawn multiple over the covenant multiple. At 7.0x against 8.5x it is 17.6 per cent, 2.32 million on the illustrative portfolio, or about 110 colocation tenancies at 21,000 a year. A carrier merger removing 60 tenancies takes leverage to 7.74x, inside the covenant but with most of the room gone.
Because ground lease buyouts absorb the cash. On the illustrative case, 11.75 million of cash before buyouts covers 5.755 million of interest 2.04 times, but buying 40 sites at 16 years of rent costs 8.832 million, leaving 2.92 million and requiring the equity to fund 2.84 million in year one.
This article is one calculation from The Digital Infrastructure Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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