Higher borrowing costs, tight financing conditions, and debt leverage built up during the COVID-19 pandemic weighed on what was otherwise stable operating fundamentals for the U.S. telecommunications and cable industry in 2023. Ratings downgrades exceeded upgrades by 5 to 1, and over 20% of our ratings are now in the 'CCC' category.

Wireless operating performance remains solid for the large U.S. telcos despite mature industry conditions and increasing competition from cable while lower levels of capex bode well for sector free operating cash flow (FOCF) generation.

Notwithstanding higher interest rates, capex, and exposure to legacy products and services, which weakened FOCF, some U.S. wireline companies have secured alternative financing to help fund their FTTH buildouts, benefiting from a favorable long-term growth profile for fiber that attracted third-party capital.

S&P Global Ratings believes the credit quality of the U.S. telecom sector will improve the for large, investment-grade issuers in 2024 on the back of modest earnings growth, lower capex, and growing FOCF. However, telcos at the lower end of the rating spectrum are feeling the effects of higher borrowing costs and may continue to be pressured.

Even though many of these issuers took advantage of low interest rates to refinance debt during the global pandemic, most have significant exposure to floating interest rates, primarily consisting of bank loans. We believe depressed equity valuations and high interest rates will continue to render the weakest capital structures unsustainable.

In the cable sector, heightened competition from FWA and FTTH persists in a maturing broadband market. This limited high speed data (HSD) subscriber growth for cable operators and, in some cases, resulted in modest subscriber losses. Most cable companies have recalibrated their operating models to drive healthy financial performances. Therefore, we continue to believe the sector's credit quality will remain solid overall in 2024, although certain operators are on shakier footing.

Key Themes for 2024

We believe improving FOCF will enable the large, investment-grade U.S. telcos to reduce leverage in 2024, but they could face increasing pressure to return money to shareholders.   Both AT&T and Verizon raised their free cash flow guidance for 2023 due to cost savings, working capital efficiencies, and better operating trends. AT&T increased its 2023 free cash flow outlook to $16.5 billion from $16.0 billion, notwithstanding the use of excess cash flow to pay down its vendor and direct supplier financing obligations, which we include in our adjusted leverage calculation. Similarly, Verizon raised its free cash flow guidance to $18 billion from $17 billion in 2023 despite capex coming in at the higher end of its $18.25 billion-$19.25 billion guidance.

We believe lower levels of capex bode well for improving FOCF in 2024 as the wireless operators wind down their mid-band spectrum deployments, despite some headwinds from higher cash taxes and interest expense. Our base-case forecast includes the following expectations:

• Verizon: Capex declines to about $17.5 billion in 2024 from about $19.0 billion in 2023. Despite higher interest expense and cash taxes, we expect FOCF to improve to $18.5 billion-$19.0 billion in 2024 from about $18 billion in 2023.
• AT&T: Even though we forecast lower distributions from DirecTV and higher cash taxes in 2024, we expect the company's FOCF will improve modestly to more than $17 billion as the wireless capex associated with the buildout of its mid-band spectrum tapers off. We forecast capex of about $21.5 billion in 2024.
• T-Mobile: FOCF improves to $16.5 billion-$17.5 billion in 2024, from about $13.5 billion in 2023, due primarily to earnings growth and moderately lower capex.

While we expect the telcos to prioritize debt reduction given the high interest rate environment, lagging stock prices could pressure management teams to return money to shareholders sooner than expected. Verizon's reported net unsecured debt to EBITDA was 2.6x as of Sept. 30, 2023, and management indicated it could buy back stock once this metric hits 2.25x. We assume the company can reach this leverage level by 2025.

However, we believe there is greater risk that Verizon initiates a share repurchase program prior to reducing its net unsecured leverage to 2.25x if its equity returns do not improve. Similarly, we believe AT&T will achieve its net leverage target of 2.5x in the first half of 2025, though the need to appease shareholder may pressure management to buy back stock at the expense of leverage reduction.

Higher interest rates for longer and looming debt maturities will weigh on speculative-grade credits.  Most issuers in the telecom and cable space took advantage of historically low interest rates during the pandemic to refinance their capital structures. Since early 2022, the Federal Reserve has pushed up interest rates in an effort to curb inflation. S&P Global Ratings' economists expect interest rates to stay higher for longer, which will contribute to high borrowing costs for our rated U.S. telecom and cable issuers.

While we expect investment-grade companies will manage their debt refinancing, we believe there is greater risk among lower-rated, speculative-grade issuers with higher leverage. In addition to their significant floating-rate exposure, which will hurt interest coverage ratios and cash flow generation unless the earnings outlook improves, some of these companies face refinancing needs over the next couple of years.

Nonetheless, we believe the high-yield telecom and cable sector overall has sufficient breathing room to deleverage or refinance well in advance of their debt maturities. We estimate there is about $6.3 billion of speculative-grade telecom and cable debt that matures in 2024, or 2% of the total. The amount increases to about $17.5 billion in 2025 (6%) and $25.3 billion in 2026 (9%). The big refinancing wall for U.S. high yield telecom and cable companies does not come until 2027, when they will need to address about 24% of outstanding debt.

Chart 1

Not surprisingly, the issuers we rate in the 'CCC' category have the greatest refinancing risk, including:

• Dish Network Corp./DISH DBS Corp. (CCC+/Negative): The company faces large debt maturities of $2.9 billion in 2024, $2.0 billion in 2025, and $7.7 billion in 2026, in addition to funding FOCF deficits from its wireless network build. Dish's all-stock merger with Hughes Satellite Systems Corp. bolsters its liquidity position, which includes about $2 billion of cash and marketable investments and $250 million-$300 million of FOCF. However, Dish will struggle to refinance its upcoming obligations at an affordable rate, in our view.
• Lumen Technologies Inc. (CCC+/Watch Neg): The company entered into a transaction support agreement (TSA) with a group of its creditors holding about $7 billion of its outstanding debt. As of Sept. 30, 2023, it had about $1.7 billion due in 2025, $498 million in 2026, and $9.5 billion due in 2027. While the TSA would enable the company to push out the bulk of its debt obligations to 2029 and 2030, giving it time to execute on its turnaround strategy, the agreement has yet to garner sufficient support from its creditors to initiate the transaction.
• Anuvu Corp. (CCC+/Stable): The satellite connectivity provider's S&P Global Ratings-adjusted leverage remains elevated at above 10x, and higher interest rates have pressured its FOCF and liquidity. While there is no debt repayment required in 2024, almost half of its debt obligations come due in 2025 and the remaining amount in 2026. Therefore, we could lower our ratings in advance of these maturities.
• Logix Intermediate Holding Corp. (CCC/Negative): The fiber bandwidth provider has about $175 million of first-lien debt due in December 2024 and another $125 million of second-lien debt due in 2025. We therefore believe there is a high risk of default in 2024 given its limited ability to refinance.

Other speculative-grade issuers that have large near-term debt maturities and may have to refinance at higher rates include:

• Altice USA Inc. (B/Negative): In April 2023, the incumbent cable provider prefunded $750 million of senior notes due 2024 with $1 billion of new senior guaranteed notes due 2028 at CSC Holdings. However, Altice was forced to issue this debt with an 11.25% coupon due to its weak earnings and poor credit market conditions. The company has another $1.5 billion of term loan debt due in 2025. We believe it has sufficient revolver capacity to repay the term loan in 2025, though this would leave it with limited liquidity buffer and likely result in further ratings pressure under this scenario. We believe the company may also be evaluating asset-backed security (ABS) financing options for its fiber assets, which could also pressure the recovery and issue-level ratings on its existing guaranteed notes if it significantly reduces the assets available to its existing lenders in a default.
• Global Tel*Link Corp. (B/Stable): The provider of inmate telecom services for correctional facilities has about $932 million of bank debt (about 70% of total debt) that matures in 2025.

Chart 2

U.S. telcos' FWA subscriber growth is strong and improves wireless churn but provides limited benefit to revenue and cash flow.  U.S. wireless carriers spent massive sums of money to acquire mid-band spectrum in recent auctions and build out those licenses, but at present have little to show for it. Material 5G Internet of Things and enterprise application revenues have yet to materialize despite the early hoopla around 5G technology. Outside of upselling customers to faster data speeds on their unlimited wireless plans, which hasn't translated into average revenue per user (ARPU) growth, the only additional revenue from 5G has come from FWA.

FWA subscriber growth was surprisingly strong over the last two years, with net customer additions of about 1 million per quarter as residential and business customers have been allured by the lower price points relative to cable and FTTH options. Further, we expect the carriers will benefit from the recently released C-band spectrum because it will add additional capacity to their wireless networks.

Verizon received 100 megahertz (MHz) of nationwide C-band spectrum, and AT&T got access to 80 MHz in late 2023. T-Mobile received another 27 MHz of C-band spectrum to go along with its vast portfolio of 2.5 gigahertz (GHz) spectrum.

That said, at some point we believe they will exhaust their spare capacity, and the economics of investing in additional FWA capacity on a stand-alone basis are challenging given the high data usage and substantially lower price per bit compared with mobile. T-Mobile's management recently highlighted this challenge, pointing to poor returns on capital to increase the scale of FWA. Therefore, we believe FWA will continue to be offered exclusively in markets that have excess capacity on a network designed primarily for mobility.

While the carriers do not break out what percentage of their revenue they derive from FWA, we believe the proportion is relatively small. We estimate FWA represents less than 1% of Verizon's revenue and 3% of T-Mobile's, although Verizon has a larger base of business given the size of its mobile and wireline operations.

In 2024, we assume FWA subscriber growth will remain healthy as new mid-band spectrum comes online, which will improve capacity, and new markets launch. We forecast industry net adds of about 3.75 million in 2023, declining to about 3.2 million in 2024. Our base case assumes FWA customers total about 13.3 million by the end of 2025, somewhat higher than guidance provided by Verizon and T-Mobile of 11 million-13 million customers because we believe that Verizon can exceed its outlook of 4 million-5 million subscribers.

We do not incorporate FWA customers from AT&T in our industry forecast yet because the company has yet to outline a comprehensive strategy or longer-term target, although given the healthy demand for the service we expect it will achieve solid growth over the near term. That said, we believe AT&T will focus its deployments in areas where fiber economics are less attractive.

Despite strong customer growth, we expect FWA will only account for 4%-5% of T-Mobile's revenue and less than 2% of Verizon's by 2025. While we view FWA as an adequate broadband solution for more price-sensitive customers in the near term, a wireless broadband connection will become less dependable relative to cable or FTTH over time because data growth will likely strain network capacity, which could result in higher churn and longer-term subscriber losses.

Our forecast includes the following assumptions.

Verizon 

• FWA net adds of 1.6 million in 2023, 1.5 million in 2024, and 1.2 million in 2025.
• Blended consumer and business FWA ARPU of $35-$38.

T-Mobile: 

• FWA net adds of 2.1 million in 2023, 1.6 million in 2024, and 1.1 million in 2025.
• FWA ARPU, which is primarily consumer-based, of about $45.

Chart 3

For the cable operators, we view FWA as a near-term headwind for subscriber growth but expect pressure will ease long term.  We believe FWA will continue to reduce the number of gross subscriber additions for cable. The service fills a niche in the market by offering faster speeds compared with copper-based internet at prices lower than cable broadband. Therefore, many households switching from copper due to inferior speeds now have a viable alternative to cable.

However, we do not envision significant customer churn from cable to FWA given that cable has a speed advantage and a powerful customer retention tool in its discounted wireless service. Furthermore, we believe FWA prices could rise and begin to limit its appeal as network capacity becomes more constrained.

U.S. wirelines look to alternative funding sources as interest costs soar.   Inflation and higher interest rates have taken their toll on the credit quality of U.S. wireline operators, which will force some to scale back their FTTH builds and capex in 2024 to conserve cash flow. Further, labor costs remain elevated and have not improved despite the Fed's effort to reduce economic activity. That said, not building fiber is a lost opportunity that increases the risk of declining revenue and cash flow as legacy products and services lose share to competitors, including copper-based broadband customers to cable.

Some issuers are not fully funded for their build plan, which means they will need to access additional capital. In 2023, Frontier Communications Holdings LLC issued $2.1 billion of fiber securitization notes by creating a bankruptcy remote special purpose vehicle to hold its fiber assets and customer contracts in the Dallas market (one of Frontier's older FTTH markets with high penetration levels and strong cash flow generation). Cincinnati Bell Inc. (d/b/a Altafiber) also raised $600 million of funding to support its fiber expansion from existing infrastructure investors Macquarie Asset Management and Ares Management.

Despite elevated interest rates and highly leveraged capital structures, we believe U.S. wirelines have an opportunity to attract capital from third-party investors, given fiber's healthy growth profile and the infrastructure-like nature of these assets. While we rate most of these issuers 'B-' or lower, we believe they have good prospects to secure alternative sources of financing. Some may look to follow Frontier's path and access the ABS market by leveraging mature assets that generate predictable cash flows, although the availability of mature markets to borrow against is likely limited.

The pace of fiber builds will slow in 2024.   We estimate U.S. wirelines expanded their FTTH service by about 6 million homes in 2023 (comparable with the 2022 build pace), including the AT&T joint-venture (JV) partnership with BlackRock, and now cover about 40% of U.S. households. However, if we exclude the homes built from the AT&T JV, we estimate new fiber passings declined by about 600,000 homes in 2023.

We expect FTTH deployments to moderate to about 5.2 million new homes in 2024. Lumen now plans to limit the pace of fiber builds to 500,000 homes per year, while Telephone and Data Systems Inc. (TDS) already announced it will reduce its spending in 2024. However, this is partially due to an increase in its planned FTTH passings in 2023 to 200,000 from 175,000.

Similarly, we expect Consolidated Communications Inc. will scale back its fiber passings dramatically in 2024 following the proposed acquisition by Searchlight. In contrast, we expect Altafiber to ramp up its fiber deployments following the receipt of additional funding from existing investors.

We believe Broadband Equity, Access, and Deployment Program (BEAD) funding will become a bigger focus in the second half of 2024, with network builds starting in 2025. However, except for AT&T, the wirelines may find it difficult to participate materially given their highly leveraged balance sheets and tight financing conditions.

Chart 4

Lead-sheathed cables present long-term credit overhang.   The July 2023 Wall Street Journal (WSJ) article that referenced the potential lead exposure from telco cables temporarily affected stock prices and bond yields for most U.S. telecom operators, including AT&T and Verizon. However, news flow faded substantially since that time, partly following some third-party testing that assuaged concerns, at least on the possible magnitude of the risk. Further, it is not clear if the WSJ provided the companies with its testing data or an explanation of the testing methodologies that validated the news agency's conclusions.

Nonetheless, the Environmental Protection Agency and other third-party investigations are ongoing and may result in some liability, including remediation and civil lawsuits. Although the ultimate financial impact is unclear and may remain so for several years, we expect remediation and related expenses, if any, will be spread out over an extended period.

In determining the impact on credit quality, the scope of any potential liability is a critical component of our assessment. It's also uncertain whether all lead-sheathed cable presents the same level of concern. For instance, overhead, buried, or cables in conduit may not all be ultimately identified as presenting the same level of environmental or health risk. Additionally, the cost or remediation strategies may vary based on this assessment, and the degree of difficulty in enacting remediation plans in various environments and conditions may differ.

We believe AT&T has the greatest potential exposure to cleanup costs and litigation. Its footprint covers almost 60 million homes, about a third of which it has upgraded to fiber. Management indicated it has about 2 million miles of copper footprint, with lead-sheathed cable accounting for less than 10%. However, about two-thirds of its lead-sheathed cable is buried in conduit, with the remainder being aerial and only a small portion under water.

Verizon stated it had 540,000 miles of copper footprint but said lead-sheathed cable makes up a small percentage of those miles, although it did not disclose a specific number. While Verizon has upgraded a large portion of its network with fiber, that does not necessarily mean it removed all of its legacy lead-sheathed cables, which could leave it exposed to potential litigation and remediation.

We expect domestic tower leasing to decline in 2024.  Following an initial surge of 5G investment in the wireless sector, most carriers have reduced their network spending, which will likely affect leasing trends for the U.S. tower operators in 2024. This is consistent with our view that wireless capex will decline to about $40 billion in 2024, from a peak $52 billion in 2022, following the aggressive build out of mid-band spectrum. Further, Dish completed its initial network build and will likely pause its wireless spending to conserve cash flow. Therefore, we forecast domestic organic tower growth to decelerate in 2024.

That said, both SBA Communications Corp. and American Tower Corp. are operating with leverage levels close to our upgrade thresholds, which gives them sufficient capacity at their current ratings. Further, both operators have multiyear master lease agreements with wireless carriers, which smooths out their growth trajectory.

In contrast, Crown Castle Inc. faces certain cash flow headwinds over the next couple of years, including higher capex and interest expense given the company's exposure to floating rate debt. As a result, we expect its S&P Global Ratings-adjusted leverage to remain elevated for the rating at about 6x through 2025.

Chart 5

Rating Trends

Notwithstanding solid industry fundamentals, downgrades outpaced upgrades by more than 5 to 1 in 2023 due to the high interest rate environment and capital structures that could not support rising interest costs. We rate about 20% of the U.S. telecom and cable issuers in the 'CCC' category, and the outlook bias is increasingly negative. About one-third of our ratings have a negative outlook or are on CreditWatch with negative implications.

Chart 6

Chart 7

In 2024, we expect downgrades will continue to outpace upgrades across U.S. telecom and cable as highly leveraged capital structures are increasingly stressed by elevated borrowing costs, primarily at the lower end of the ratings scale. We therefore expect the percentage of issuers we rate in the 'CCC' category to increase. While S&P Global Ratings' economists expect the Fed to lower rates in the back half of 2024, it may be too late for many of these issuers that are saddled with a significant amount of debt and high interest costs, which will depress their cash flow and hurt liquidity.

Sector Outlooks

We expect U.S. wireless subscriber and service revenue growth to slow in 2024.  Overall, wireless postpaid subscriber trends remained healthy during the first nine months of 2023 despite maturing industry conditions, although cable took a larger share. We expect more of the same in 2024, although the pool of new potential customers continues to shrink. We therefore forecast a 7%-9% decline in postpaid phone net adds during the year. Further, we expect cable's share of postpaid phone net adds will increase to almost 52% from 45% in 2023.

Chart 8

Excluding Verizon's reclassification of wireless "other" revenue into service revenue, we expect overall industry wireless service revenue growth of about 3% in 2023, down from 4% in 2022. Notwithstanding our expectation for slowing postpaid subscriber growth and prepaid losses, we forecast the industry will grow service revenue by about 2.5% in 2024. This is due to rate increases on legacy plans, customer migration to more expensive 5G rate plans, and growth from FWA.

We also expect upgrade rates will remain low in 2024 as consumers hold on to their handsets for longer periods given the limited appeal of new devices and the migration of customers to three-year upgrade cycles from two years, which reduces monthly handset expense. While the latter will continue to pressure equipment revenue, it also benefits carrier margins because they do not earn any money from the sale of handsets to customers. Coupled with cost reduction initiatives and improved spectral efficiency from 5G wireless technology, we expect modest earnings growth of 3% in 2024, somewhat lower than our forecasted 5% growth in 2023.

Chart 9

Our base-case forecast for the industry assumes EBITDA growth and lower capex will somewhat improve FOCF and S&P Global Ratings-adjusted leverage in 2024. However, we do not incorporate any shareholder distributions beyond what the companies have already communicated, although we believe there is greater risk that AT&T and Verizon may initiate new share repurchase programs, which would constrain leverage improvement. For T-Mobile, we expect shareholder distributions will offset earnings growth and FOCF such that its leverage remains steady in the mid-3x area.

Chart 10

Wirelines will continue to face headwinds in 2024.  While the outlook for U.S. wirelines could be favorable over the longer term, we expect headwinds will persist in 2024, weakening credit metrics while companies are trying to reverse their earnings trajectory. High interest rates, inflation, and exposure to legacy revenues--such as multiprotocol label switching and digital subscriber line services--will continue to weigh on credit metrics as they transition their business to newer technologies and fiber.

In the consumer segment, building out FTTH across their footprint is the ultimate path toward growth, though higher costs per passing and elevated interest expense are making it more challenging to earn an adequate return on investment. As a result, we expect many will curtail their expansion plans to conserve cash flow amid an uncertain macroeconomic environment unless they can secure alternative sources of capital.

Revenue from business wireline services continues to erode because legacy services are in secular decline while customers transition to less-expensive networking technologies. Large enterprise customers, in particular, are accelerating their digital transformation, with cloud and artificial intelligence (AI) adoption among the key priorities to reduce expenses in an uncertain economic environment. This trend will hinder earnings growth for U.S. wirelines over the next year. Telecom issuers with the largest exposure to business services include Lumen (80%), Frontier (45%), and AT&T (18%).

We expect overall top-line pressures to continue in 2024, with revenues declining 4%-5%, although results will vary by provider depending on how far along they are with their fiber builds. At the same time, we expect revenue from business services will continue to fall in the high-single-digit percent area due to reduced information technology (IT) spending and exposure to legacy products and services.

However, our base-case forecast assumes the industry will begin to see some positive earnings trends by 2025 due to the following:

• Increasing fiber coverage will start to yield benefits, even if fiber broadband subscriber growth is not sufficient to offset losses from copper, because FTTH customers typically have higher ARPU, which will grow as they move to faster data speed packages.
• Improved scale and cost-cutting initiatives following several years of buildout activity.
• Potential recovery in IT spending once economic growth picks back up in 2025.

Despite our expectation for lower capex in 2024, we expect credit metrics, including S&P Global Ratings-adjusted leverage, will remain weak during the year because higher interest expense will continue to pressure FOCF even if industry EBITDA trends improve.

Chart 11

Chart 12

Telecom capex will continue to decline in 2024.   We expect U.S. telco capex to drop about 10% in 2024 following an approximate 12% decline in 2023. We base our forecast on the following factors:

• We expect wireless capex to fall about 9% in 2024 as the bulk of mid-band spectrum deployments are winding down. Further, T-Mobile continues to realize capex synergies from its acquisition of Sprint.
• Wireline capex declines 10%-11% in 2024 following a modest 1% increase in 2023 as wireline operators scale back their FTTH builds to conserve cash flow in a high interest rate environment. Already, Lumen announced its capex will decline $200 million-$300 million in 2024 as it limits the pace of fiber builds. Consolidated plans to reduce its fiber deployments in 2024, resulting in a sharp decline in its capex by $300 million to $350 million in 2024. While we expect Frontier will maintain its fiber build pace of about 1.3 million passings, we also believe it will increase its mix of lower-cost deployments (i.e., lower cost per passing).

Chart 13

Chart 14

Cable EBITDA will grow in the low-single-digit percent area for the foreseeable future, aided by wireless offerings.   We project modest EBITDA growth for the industry driven primarily by higher broadband ARPU, footprint expansion, business services, and improving wireless economics for the larger operators, which will be partly offset by modestly lower broadband penetration levels due to elevated competition from FWA and FTTH.

We believe attractively priced mobile wireless offerings serve as a powerful broadband churn reduction mechanism for large cable operators, particularly considering the average wireless spend is 3x larger than the in-home broadband bill. Given the capital-light nature of the service combined with the fact that these operators are not running wireless to maximize stand-alone profits, we believe they can match or exceed any discount on broadband offered by a FWA or FTTH competitor. We expect this will continue to limit subscriber losses to some degree despite elevated competition.

Separately, for the large cable operators, we believe wireless offerings will drive EBITDA growth over the next three years as the drag from new customer additions is more limited, startup costs ease, and they can spread overhead over a larger customer base. Both Comcast and Charter have about 10% of broadband homes on wireless plans, so we believe there is a long runway for wireless top-line growth and margin expansion, with a modestly profitable mobile virtual network operator (MVNO) agreement. We believe the economics will improve over time as these companies move traffic on-network and deploy owned Citizens Broadband Radio Service (CBRS) spectrum via stand-mounted small cells.

For smaller operators, we believe wireless will be a drag on profitability initially. It took Comcast about four years to reach stand-alone profitability. Given their more limited scale, these smaller operators may not receive such attractive terms on their wholesale MVNO arrangements, which could limit their ability to price wireless offerings as aggressively as Comcast and Charter. Furthermore, certain highly leveraged operators such as Altice USA Inc. do not have the financial flexibility to absorb wireless losses, which could limit their effectiveness.

Conversely, we believe overbuilders such as WideOpenWest and Radiate Holdco LLC are at a significant competitive disadvantage relative to Comcast or Charter. Historically, these operators have competed on price and customer service, but bundled wireless discounts offered by the incumbent cable operators are more compelling and will make it more challenging for overbuilders to attract and retain broadband customers.

Chart 15

Most cable operators can still grow broadband ARPU, but 2024 carries more uncertainty.   We believe there are opportunities for ARPU growth longer term as customers migrate to faster speed tiers, although the balance may shift more toward price increases and monetization of add-ons over the next year, which carries more risk. Still, we do not anticipate material churn if price increases are slow and gradual. Furthermore, many cable operators are offering advanced Wi-Fi security, network management, modem refreshes, and whole home coverage for an additional fee, which could support modest ARPU growth.

We believe the pace of up-tiering could slow in 2024 given that the average speed taken is now above 400 megabits per second (Mbps), according to Pew Research. We believe these internet speeds are more than sufficient to meet the needs of most consumers today, which could make it challenging to upgrade customers to the more expensive 1 gigabit per second (Gbps) tier in the near term.

For example, Comcast reported that about 75% of its customers take at least 400 Mbps, leaving fewer customers available to migrate up. However, over time we expect speeds of at least 1 Gbps will be the most popular, which provides a long-term runway for growth. For example, roughly 40% of Altice USA's new customers take speeds of 1 Gbps, while only about 20% of its base subscribe to these higher data speeds. Similarly, Comcast reported that only about one-third of its base currently takes the more expensive 1 Gbps tier.

We do not envision most incumbent cable operators engaging in a price war with the competition. We expect they will maintain pricing discipline against FWA, recognizing there will be a limit to how many customers can be loaded on a wireless network. Instead, most operators are highlighting speed advantages in marketing campaigns, and many have increased the entry-level speeds above what T-Mobile is capable of offering.

With respect to FTTH, we believe these competitors rely on increasing ARPU to earn an acceptable rate of return, which places a natural floor on how aggressive they will be with price long term. For example, AT&T Fiber has been raising prices, with its ARPU up 9% in the third quarter of 2023. To the extent that FTTH prices are lower, most cable operators will use aggressive mobile prices to offset any discounts being offered by FTTH competition on in-home broadband to retain broadband customers, rather than lower broadband ARPU.

Chart 16

Cable network investments will increase in 2024.   We believe the coaxial network upgrade cycle that most cable operators are embarking on over the next three years is necessary and will provide a path toward long-term ARPU growth while also serving to protect existing market share. However, we also recognize that elevated capex also reduces financial flexibility at a time when EBITDA growth is slowing.

These upgrades are within the historical capital spending envelope of 12%-14% of revenue and can be achieved for a relatively affordable amount of $100-$200 per home passed. These investments will enable multigigabit download speeds and at least 1 Gbps upload speeds, which are important from a marketing and competitive standpoint.

The other major component of cable capital spending is line extensions, bringing average capex-to-revenue above 17% through 2025. We generally view rural footprint expansion favorably, provided it does not increase financial leverage but rather comes in lieu of shareholder returns. We expect this will be the case for most cable providers. Government-subsidized rural footprint expansion from BEAD will help drive subscriber and EBITDA growth because there is no competition from fiber in these markets, so customer penetration will likely be above average. We believe this will be the primary driver for subscriber growth in the future given the increasingly competitive and mature conditions in incumbent markets.

Altice USA is the outlier in the industry because it is embarking on a FTTH network upgrade, which is more expensive than a coaxial upgrade. The company's elevated capital spending has eroded its FOCF and eliminated its leverage reduction capability near term. Given that its debt to EBITDA is currently elevated at almost 7x and it has a limited equity cushion, it has little capacity to reduce debt absent a reduction in capex. While we recognize FTTH is the fastest technology available and will future-proof the network, we believe the recent weakness in Altice USA's operating performance is primarily due to poor management from the prior regime and an underinvestment in customer-facing roles.

Chart 17

Investment-grade issuers are on solid footing, but the credit quality of speculative-grade companies will remain weak.  Overall, we expect credit quality of large, investment-grade telcos will improve on the back of higher FOCF and modest earnings growth. In cable, competition from FTTH and FWA will likely limit credit metric improvement, and some of the smaller operators are on shakier footing because they lack a scaled mobile product to bundle with broadband. We believe telecom and cable issuers at the lower end of the rating scale could experience further FOCF and liquidity pressure unless the interest rate environment improves.