Tom Westdyk is Managing Director of CIT Communications, Media & Entertainment. He is responsible for the leveraged finance origination and advisory efforts for all communications industry and information services and technology sectors, including cable television, wireline, wireless, communications towers, related service providers, technology and datacenters.
Q: What are some of the recent industry trends you are seeing across the Communications and Information Services spectrum?
A: We’re witnessing positive industry trends in both of these sectors. In Communications, we see continued growth in demand for voice, video and data infrastructure. The catalyst of this growth is sourced from both consumers and corporations who are accepting and integrating more and more new devices and services into their personal lives and business operations. This theme has been relatively consistent through several economic cycles as the underlying services have become utilitarian in some cases and mission critical in others. Other dynamics of this growth include expanding geographic access as well as the ongoing acceleration of communication and computer processing speeds.
In the Information Services & Technology Sectors, we see traditional communications and media industries continue to exhibit a natural migration toward online/digital distribution channels and technology-enabled services. Additionally, the need to reduce operating costs, the demand for real-time information, the desire to improve the business decision making process and ever increasing regulatory/compliance mandates continue to drive growth in demand for technology, information services and software.
Q: Has the continued economic uncertainty affected the Communications and Information Services & Technology sectors?
A: It really hasn’t and there are some sound reasons why this is the case. On the corporate side, many of the applications and services provided by the Communications and Information Services sectors drive efficiency. As such, companies are willing to purchase these technologies and services because they introduce sustained operating improvement that increases profitability long-term. In addition, companies today are realizing the benefits and capital efficiency of outsourcing as their communications infrastructure and information services needs continue to grow. As an example, the growth in demand for data center assets and services continues to outstrip the growth in supply by about two to one.
On the consumer side, Cable Television and Wireless Communication providers have weathered the recession well. This resilience stems from some utility-like operating characteristics, coupled with the fact that many consumers view subscription-based TV and internet access (both fixed and wireless) as relatively inexpensive entertainment options, especially during difficult economic periods. While some consumers have shifted a portion of their disposable income between these services, the underlying demand remains strong.
Q: There are now more wireless subscriber connections in the U.S. than people. How does the inherent limit on subscriber growth present a challenge for wireless carriers?
A: While wireless subscriber growth in the United States is slowing down, the demand for mobile video and high bandwidth data services across the wireless platform is increasing dramatically. The introduction of smart phones, tablets and other devices, with their ever growing number of applications, is driving explosive usage of mobile wireless networks.
Wireless carriers are currently focusing their efforts on competitively meeting this demand. The major providers are moving aggressively to geographically expand their 3G and 4G networks beyond major metropolitan areas into more rural markets. The expectation for service in these areas is just as high as it is in major metropolitan areas. We’re also seeing the need for more cell towers both in metropolitan areas and in rural areas, where subscribers are demanding better service. In metropolitan areas, as the consumption of bandwidth increases, cell sites have to be split, creating the need for more towers and network infrastructure.
Wireless providers are also adjusting their service offerings to monetize the increased network demand by the customer. Many of the major providers are no longer offering “unlimited” data use plans to new subscribers. Instead, they are moving to a “metered” pricing plan that charges based on the customers’ network usage.
Q: What makes the Information Services and Technology Sectors attractive from a lending perspective?
A: IS&T businesses are well suited for leveraged loans, as their revenue models are highly recurring in nature. These revenues are typically supported by licenses, subscriptions, contracts, high-quality/diverse customer bases and high customer retention rates. Additionally, cash flow margins are high due to scalability of these businesses that creates significant operating leverage. In many cases, favorable working capital dynamics and low capital expenditure requirements contribute to rapid free cash flow and deleveraging capability.
Q: Where are companies in your target sectors investing their capital?
A: In the Information Services and Technology sector, M&A as well as rapid organic growth continue to drive the demand for capital. The scaling and consolidation of these industries at attractive valuations gives us the opportunity to support key equity sponsor relationships that share our expertise and commitment to this space.
In the Communications space, there is a great deal of capital being invested in the data center, metro fiber and tower segments for mergers and acquisitions, as well as organic growth. The underlying nature of many of these sectors is that they are capital intensive, which provides us with attractive lending opportunities that are based on recurring or contracted revenues and high cash flow margins.
Q: How has CIT managed to differentiate itself from its competition?
A: Our team has several decades of combined lending experience and many of us have been working together for a dozen years. We have a level of expertise in these industries that sets us apart. We have been able to successfully grow our business and expand our reach from relatively mature Communications segments (such as Cable TV and Voice providers) into some new areas that have evolved (such as Data Centers and Information Services) while enhancing our equity sponsor relationships along the way. Over the years, we have been able to identify a mix of relatively early stage and more seasoned financing opportunities to develop a diversified portfolio. We use our industry expertise to develop relationships with some companies at a relatively early stage, put a creative financing structure around that relationship and then grow with that customer as their business grows.
We recently announced two deals where we provided senior secured credit facilities. The first was with American Internet Services (AIS), a leading provider of enterprise-class data center and connectivity services in the Western United States. The second was with TA Associates, a leading middle market private equity firm, to facilitate its acquisition of CoSentry, an Omaha-based provider of outsourced IT infrastructure services. These financings are great examples of our long-standing support for middle market companies in the IT infrastructure market and the data center sector.