In December, the FCC launched an auction for “C-band” spectrum. The auction is important due to both the large amount of spectrum being offered and the fact that “mid-band” spectrum is widely considered to be the workhorse for 5G. Spectrum continues to be a key differentiator for the leading U.S. cellular operators, and their success in this auction will impact their competitive positioning for years to come.

Against this backdrop, bidding in the auction has been aggressive. Original estimates of total C-band spending were in the area of $40 billion. Now, it looks like total bids will exceed $90 billion. This would make the C-band auction the second largest wireless spectrum sale in history, behind only the 2001 European telecom 3G spectrum auction, which was $130 billion.

The largest U.S. operators’ need for C-band spectrum is largely driven by their existing spectrum holdings. Verizon, and to a lesser extent AT&T, have the greatest need for mid-band spectrum. T-Mobile, on the other hand, already has a strong position in mid-band and can be a less aggressive bidder in the C-band auction.

When total bids were expected to be in the $40 billion area, all three operators were well-positioned to fund their spectrum purchases with debt, and in a manner commensurate with their current credit profiles. However, as the price has more than doubled, investors have raised concerns around credit rating pressures and a potential abundance of new bond supply.

We expect the three largest cellular operators to account for the vast majority of C-band spending: Verizon (about $40 billion), AT&T ( about $25 billion) and T-Mobile ( about $15 billion). While these amounts are clearly higher than original expectations, we view them as manageable given the levers each operator can deploy to mitigate credit concerns. These levers include free-cash-flow generation, potential non-core asset sales, and reduced or eliminated share buyback activity. We believe recent ratings upgrade momentum for Verizon (Baa1/BBB+) may be delayed, and we see some risk of a negative outlook at AT&T (Baa2/BBB) (we do not expect any action at T-Mobile (Baa3/BBB-)). But all three companies remain strongly committed to solidifying their long-term investment grade ratings, and we believe they have credible paths to do so.