Many investors ask how S&P Global Ratings calculates leverage for certain U.S. telecommunications and cable companies. We therefore provide our analytical adjustments for EBITDA and debt for these companies that we rate: AT&T Inc., Charter Communications Inc., Comcast Corp., T-Mobile US Inc., and Verizon Communications Inc.

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Frequently Asked Questions

What debt adjustments does S&P Global Ratings make for U.S. telecommunications and cable companies?

Many of our adjustments to a company's as-reported debt balance--such as the tax-affected unfunded portion of pension and other post-employment benefits and the netting of accessible cash and liquid investments--are common across most corporate issuers. However, we also make several less common sector-specific adjustments to debt, most notably for captive finance operations for wireless equipment receivables. Wireless companies offer customers so-called equipment installment plans (EIPs) to finance the cost of their mobile handsets. These plans qualify as captive finance operations under our criteria (see "Standard & Poor's Analytical Approach To Wireless Equipment Installment Plans," published March 30, 2016), in line with our captive finance criteria (see "The Impact Of Captive Finance Operations On Nonfinancial Corporate Issuers," published Oct. 23, 2023).

Because we base this calculation on publicly available data, we show this adjustment for AT&T and Verizon. (For more details on our methodology and adjustments, see "Corporate Methodology: Ratios And Adjustments" and "Guidance: Corporate Methodology: Ratios And Adjustments," both published April 1, 2019).

How does S&P Global Ratings treat wireless companies' EIPs?

EIP operations differ in many ways from traditional captive finance operations, but we believe these plans function primarily as a means to market the wireless carrier's ultimate product--its network--to end users. We also believe this is true of traditional subsidy plans, in which wireless carriers essentially finance or subsidize a portion of the handset cost.

However, a key difference (and a limiting factor in applying our captive criteria to subsidy plans) is that under EIP accounting, a long-term asset is created, akin to a loan that would not exist under subsidy accounting. This financial asset can be more easily separated and monetized than service revenue receivables. As a result, we believe it's more appropriate to measure debt associated with financing equipment receivables against these financial assets as opposed to the cash flow of the underlying business.

How does S&P Global Ratings adjust for wireless companies' captive finance operations?

We make such adjustments assuming the captive operations are material, which occurs if excluding the captive operations the financial risk profile would move by one category or we expect it to move one category over time. We use an estimated debt-to-equity ratio based primarily on the net-loss ratio. This depends on our assessment of asset portfolio quality, including the net-loss rate, because these companies do not monitor and report EIP debt and equity funding separately. Specifically, we estimate the captive's debt based on its on- and off-balance-sheet EIP receivables divided by an implied debt-to-equity ratio. The operator's net loss ratio--based on the historical and expected loss ratios, as well as underwriting standards--determines the estimated debt-to-equity ratio.

We also derive the captive's EBITDA by calculating its revenue less operating expenses. Finally, we deconsolidate the company's captive debt and EBITDA when determining adjusted leverage. We also add back its off-balance-sheet EIP receivables to reported debt.

How does S&P Global adjust for captive finance operations in other businesses?

We exclude the captive's financials from our analysis of the parent by making analytical adjustments to reported consolidated figures if:

• We expect 70% or more of the captive's net earning assets to originate from sales or leasing of the nonfinancial corporate issuer's (new and used) goods or services;
• We believe that the captive's key strategic mission is facilitating overall sales of the nonfinancial corporate issuer;
• We can separate the risks and rewards of the nonfinancial corporate activities (which we call the industrial operations or "industrial") from the captive finance operations; and
• The captive is deemed material (financial risk profile would move one category on a consolidated basis).

The objective of the adjustment procedure is to enable analysis of the core business by deconsolidation of the captive finance operation. This is because the financial assets of captive entities can typically support, like other financial companies, more leverage than typical industrial assets. This adjustment recognizes the differences in business dynamics and economic characteristics between captive and industrial operations and the appropriateness of using different financial measures, rather than analyzing the credit quality based on consolidated financial metrics. We apply this to Cox Enterprises Inc.'s NextGear operations.

When a company buys or merges with another, does S&P Global Ratings assess ratings based on pro forma adjusted leverage?

We generally don't assess the impact of mergers and acquisitions on ratings using pro forma EBITDA unless there's a compelling reason. Pro forma financial statements allow for a more representative measure of full-year performance and more significant ratios, but they have limitations. First, they reflect the financial performance of the acquisition under a different management team, so at best it's an approximation of how the larger company will perform. Each company may have somewhat different accounting standards, especially for how they amortize programming costs. Also, pro forma estimates that companies provide to the market reflect recognition of all immediate synergies.

Companies realize most synergies over time (and some not at all), and most companies' pro forma guidance doesn't include the costs (i.e., severance, restructuring) to achieve those synergies. For example, T-Mobile's original 2018 pro forma guidance for its merger with Sprint recognized $6 billion in expected synergies (it has since increased to $7.5 billion), even though the company expected to achieve those synergies over three to four years.

How does S&P Global Ratings calculate EBITDA?

We define EBITDA as a company's revenues minus operating expenses (excluding depreciation, amortization, and noncurrent asset impairment and impairment reversals). We include any cash dividends the company receives from affiliates, associates, and joint ventures, and we exclude the company's share of these investees' profits. We also exclude any share-based compensation expense payable in shares. We include restructuring and acquisition-related costs in our EBITDA calculation, but exclude asset impairments and write-downs.

How frequently does S&P Global Ratings update its adjustments?

We update our adjustments for operating leases, pension, and post-employment benefits once each year, when the companies release their form 10-K annual reports. However, we have made midyear adjustments when deemed material. We update all other adjustments quarterly.

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Related Criteria

• Corporate Methodology: Sector-Specific Corporate Methodology, April 4, 2024
• Corporate Methodology, Jan. 7, 2024
• Corporate Methodology: The Impact Of Captive Finance Operations On Nonfinancial Corporate Issuers, Oct. 23, 2023
• Corporate Methodology: Ratios And Adjustments, April 1, 2019

Related Research

• Credit FAQ: Calculating Leverage For Selected U.S. Telecommunications, Cable Companies (2023 Update), April 17, 2023
• Guidance: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• Standard & Poor's Analytical Approach To Wireless Equipment Installment Plans, March 30, 2016
• The Impact Of Captive Finance Operations On Nonfinancial Corporate Issuers, Dec. 14, 2015