OREANDA-NEWS. A modest positive effect on Verizon's credit profile is likely should it increase capacity via spending on small cells, deployment in unlicensed spectrum and on advances in technology rather than by acquiring spectrum at relatively high valuations, according to Fitch Ratings.

The costs to increase capacity through capital deployment are declining, but the fact that such spending occurs on a very granular level within each market makes broad comparisons to spending on spectrum challenging. Only the carriers have the data to know where the various technology solutions can be deployed efficiently.

Potential near-term pressure on the balance sheet arising from the acquisition of a large block of spectrum is unlikely, based on Verizon's recent statements that its plans do not require large blocks. However, Fitch expects the company may be opportunistic in acquiring smaller blocks, as it has done over the years. Under the right terms and conditions as well as economics, Verizon has not ruled out leasing spectrum in the future.

Verizon hosted a call discussing the outcome of the Federal Communications Commission's (FCC) recently concluded AWS-3 spectrum auction. This took place following the expiration of the anti-collusion quiet period on Feb. 13, which was also the due date of the 20% spectrum down payment.

An overview of Verizon's technology deployment plans was a key part of the discussion and allays concerns that Verizon did not get enough spectrum in the auction once bidding reached lofty levels. The company believes it could better address its capacity needs through its capital and technology deployment strategies vs. the purchase of overvalued spectrum. Verizon also provided details on its plans to finance its \$10.4 billion spectrum purchase.

On Jan. 30, the FCC announced the winning bidders in its AWS-3 auction, where the total bids of nearly \$45 billion exceeded even the most optimistic estimates. In the auction, Verizon bid approximately \$10.4 billion, below the \$18.2 billion in total bids by AT&T and approximately \$13.3 billion gross bids (\$10 billion, net) by entities in which DISH Network had invested under the FCC's Designated Entity program (which received discounts).

The 181 licenses won by Verizon cover a population of 192 million, or 61% of the US. Combined with its relatively deep existing AWS spectrum portfolio, the company will have 40 MHz or more of AWS spectrum in 92 of the top 100 markets, covering 96% of the US population. Not only will this spectrum increase capacity, through carrier aggregation technology the company will be able to offer faster speeds.

In broad terms, carriers with an efficient spectrum portfolio have coverage spectrum and capacity spectrum. For Verizon, the propagation of its low-band, 700 MHz spectrum provides coverage, and its AWS spectrum adds to capacity. In participating in the AWS-3 auction, Verizon weighed the cost of spectrum versus its ability to increase capacity through forthcoming technology advancements, the use of unlicensed spectrum for supplemental downlinks, and raising cell density through small cell deployments and distributed antenna systems. Capacity can also be increased by refarming existing spectrum (PCS and cellular spectrum) supporting previous technology generations with 4G LTE technologies.

For participants in the auction, 20% down payments were due Feb. 13, and Verizon funded its remaining down payment amount of approximately \$1.2 billion - net of a \$0.9 billion deposit made in 2014 - from cash on hand. While Verizon's consolidated cash balances were \$10.6 billion at Dec. 31, 2014, Verizon will use a \$6.5 billion term loan to fund the remaining \$8.3 billion spectrum payment due March 2, with the remainder funded by cash on hand. Verizon has used a portion of its cash to fund a \$5 billion accelerated stock repurchase plan announced in early February.

In the near term, the auction will lead to a modest rise in debt, as Verizon will use the approximately \$5 billion in tower sale proceeds to be received in the next two or three months to pay down most of the term loan. In 2016, Verizon will use the \$6.8 billion in proceeds from its wireline operations sale to Frontier Communications to further delever by repaying maturing debt.