OREANDA-NEWS. Fitch Ratings has assigned a 'BB+/RR4' rating to United States Cellular Corp.'s (USM) senior unsecured note offering due 2064. Proceeds will be used for general corporate purposes, including the acquisition of additional spectrum.

USM's current Issuer Default Rating (IDR) is 'BB+' with a Stable Rating Outlook. USM's ratings consider the consolidated ratings at its parent Telephone and Data Systems, Inc. (TDS), which also has an IDR of 'BB+' and a Stable Outlook.

KEY RATING DRIVERS

Wireless Market Position: USM's ratings reflect the challenges faced by the company's wireless business. USM is the fifth-largest wireless operator in a market dominated by four national wireless operators. This concern is mitigated by TDS' financial flexibility arising from its healthy liquidity position and relatively low leverage for the rating. USM's subscriber trends in core markets improved in the second half of 2014; however, operating profitability in 2014 was suppressed due to billing system issues early in the year as well as higher losses on equipment driven by strong smartphone sales. Positive, though modest, net additions have continued in 2015 owing to much improved churn rates.

Leverage: TDS' gross leverage was 2.16x at Sept. 30, 2015, including a portion of partnership distributions received from noncontrolled entities (2.3x without). Partnership distributions will be temporarily lower in 2015 and 2016 due to a one-time charge at the Los Angeles partnership related to a capital lease for AWS-3 spectrum covering the partnership's market.

Spectrum: USM participated in the Federal Communications Commission's (FCC) spectrum auction for AWS-3 spectrum through its limited partnership interest in Advantage Spectrum. Advantage Spectrum won 124 licenses with a total value of $338 million, net of the 25% designated entity discount. USM is evaluating its participation in the FCC's incentive spectrum auction slated for early 2016.

Solid Financial Profile: The ratings at TDS and USM reflect the current strong liquidity position owing to substantial cash balances, conservative balance sheet, long-dated maturities and unused revolving credit facility capacity of $399 million and $282 million at TDS and USM, respectively.

Noncore Assets: The sale of noncore assets has mitigated the effect of negative FCF on USM and TDS. USM has sold wireless towers located in the Chicago and St. Louis markets for approximately $159 million. Of this amount, the balance of approximately $142 million was received in January 2015, following an initial amount received in 2014. The customers in these markets had been sold to Sprint in 2013. In 2015, the company has received $145 million in cash from spectrum exchanges. While Fitch believes TDS considers USM's 5.5% stake in the Los Angeles partnership and its tower portfolio as core assets, Fitch also recognizes these assets provide the company with financial flexibility should the need arise as it pursues growth in the cable industry.

FCF Expectations Pressured: Fitch expects TDS' consolidated free cash flow (FCF) levels in 2015 to be negative due to the continued high level of capital investment and low margins in the wireless business. In 2015, Fitch expects negative FCF in the range of $250 million to $325 million, a material improvement relative to negative FCF of $463 million in 2014. Capital spending is estimated by TDS to approximate $825 million in 2015, up from approximately $800 million in 2014.

KEY ASSUMPTIONS

--Fitch assumes a low single digit decline in wireless service ARPUs during 2015 to 2017, which is offset by moderate gross subscriber additions and growth in equipment revenues under equipment installment plans. Churn is expected to remain around 1.4% to 1.5%, in line with levels seen in 2015 and slightly below the 1.6% rate during 2H'14.

--Wireless EBITDA margins improve to the low double digits from the 8.7% level in 2014. Higher sales on equipment installment sales are helping margins, as the loss on equipment sales decreased by $196 million in the first nine months of 2015.1H'15 alone.

--TDS Telecom demonstrates revenue growth due to cable acquisitions and growth in Hosted and Managed Services. Fitch expects 2015 EBITDA in the segment to decline in a 0% to 2% range, before returning to nominal growth in the years ahead.

--Fitch estimates leverage could increase to the 2.7x to 2.9x range in 2016 (2.5x to 2.7x including a portion of partnership distributions), as USM explores the opportunity to bid on additional spectrum assets. USM's plans are not known but for forecasting purposes, Fitch assumes USM spends a similar amount to what they spent on the AWS-3 auction.

RATING SENSITIVITIES

Positive Trigger: Positive actions are not contemplated at this time.

Negative Trigger: Longer-term, Fitch believes TDS' and USM's ability to grow revenues and cash flows while competing effectively against much larger national operators is key to maintaining their 'BB+' Issuer Default Ratings. In addition, if gross leverage (calculated including partial credit for material wireless partnership distributions in EBITDA) approaches 3.5x, a negative action could be contemplated.

LIQUIDITY AND DEBT STRUCTURE

Strong Liquidity Profile: In relation to its total outstanding debt of $2.22 billion at Sept. 30, 2015, TDS has relatively high balances of cash, which amounted to $865 million. The ratings at TDS and USM reflect the current strong liquidity position owing to substantial cash balances, conservative balance sheet, available revolving credit facility capacity and generally long-dated maturities.

Debt Maturities: At TDS, a $400 million ($399 million of capacity) revolving credit facility matures in December 2017, as does a $300 million ($282 million of capacity) revolving credit facility at USM. The only material near-term maturity is the $225 million CoBank loan, which matures in 2022. The loan was drawn in July 2015. The earliest notes at TDS are due in 2045 ($116 million) and at USM the earliest note maturity is in 2033 ($544 million face value).