TEXT-Fitch keeps Sprint Nextel on rating watch positive
Dec 18 - Fitch Ratings maintains the following ratings for Sprint Nextel Corporation (Sprint Nextel) and its subsidiaries on Rating Watch Positive: Sprint Nextel --Issuer Default Rating (IDR) 'B+'; --Senior unsecured credit facility 'BB/RR2'; --Junior guaranteed unsecured notes 'BB/RR2'; --Senior unsecured notes 'B+/RR4'. Sprint Capital Corporation --IDR 'B+'; --Senior unsecured notes 'B+/RR4'. Nextel Communications Inc. (Nextel) --IDR 'B+'. Fitch has maintained the Rating Watch Positive after Sprint Nextel entered into a definitive agreement to acquire the approximate 50% stake in Clearwire Corp. it currently does not own for $2.2 billion. Sprint Nextel will also provide a loan of up to $800 million in interim financing in the form of exchangeable notes, which will be exchangeable under certain conditions for Clearwire class B common stock. Under the financing agreement, Sprint has agreed to purchase $80 million of exchangeable notes per month for up to 10 months beginning in January 2013. The transaction will require regulatory approval and a majority of non-Sprint owned Clearwire shares. The Clearwire acquisition, which is contingent on the Softbank transaction finalizing, is expected to close mid-2013 at approximately the same time as Softbank. Fitch believes Clearwire's spectrum assets are integral to Sprint Nextel's long-term LTE plans by solving the need for high capacity spectrum in its urban cores. This strengthens Sprint's competitive position and ability to differentiate unlimited wireless broadband offerings from its national peers. As such, Fitch views this strategically as a positive event since the acquisition would give Sprint Nextel complete control of Clearwire's spectrum and allow Sprint to fully integrate Clearwire assets into its network. Thus the transaction eliminates future equity contributions, reduces inefficient operating expenses and facilitates the execution of its strategic plans. From a credit profile perspective, pro forma leverage would increase to over 5x. Given the increase in leverage, the prospects for a ratings upgrade to 'BB-' once the two acquisitions close have potentially diminished. Sprint's execution on stated network objectives and whether the company can demonstrate further operational and financial improvements in the coming quarters despite the increased competitive intensity has elevated importance. Material uncertainty also still exists with Sprint's post-transaction capital structure plans and uses for Softbank's capital infusion which will be a key factor in the final rating decision. Uncertainty exists whether non-Sprint Clearwire shareholders will approve the transaction. Fitch believes Clearwire's stand-alone prospects were bleak due to its constrained liquidity, limited access to new capital and inability to attract major new customers. Over time, as consolidation has removed potential wholesale partners and operators have become more efficient with spectrum assets through acquisition and swaps, the industry has obviated the need for a wholesale operator. Clearwire's lack of additional strategic agreements with other operators, limited market access and substantial funding gap left the company heavily reliant on Sprint Nextel for further funding. Absent Clearwire shareholder approval, a financial restructuring of Clearwire is quite possible. This would have significant implications and risks for Clearwire's stakeholders with an uncertain outcome. In addition, a financial restructuring would introduce material uncertainty with Sprint's longer-term network and spectrum plans. Clearwire was expected to begin supplying Sprint with hotspot capacity for its LTE network beginning in mid-2013. Fitch now views Sprint Nextel's liquidity as strong despite the significant cash requirements expected through at least 2013. In addition to the expected $8 billion from Softbank, Sprint Nextel's liquidity position is supported by $6.3 billion of cash and $1.2 billion borrowing capacity under its $2.2 billion revolving credit agreement at the end of the third quarter 2012. Fitch expects Sprint Nextel will consider parameters for a new facility in early 2013 given the October 2013 maturity. Approximately $423 million is also available through May 31, 2013 under the first tranche of the secured equipment credit facility. The incremental Softbank investment has afforded Sprint Nextel considerable financial flexibility to address refinancing requirements and strategic investments which the company has demonstrated in the past two months. Sprint has significantly improved its maturity profile as a result of debt issuances in the past year and reduced refinancing risk in the midst of a capital intensive period. In mid-2011, Sprint had $8 billion in debt maturities during the next four years, including $2.3 billion in 2012, $1.8 billion in 2013, and $1.4 billion in 2014. For the third quarter 2012, pro forma for the November $2.3 billion debt issuance, Sprint has approximately $1 billion in debt maturities during the next three years including $317 million in 2013, $198 million in 2014 and $500 million in 2015. WHAT COULD TRIGGER A RATING ACTION Negative: The ratings are on a Rating Watch Positive. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating downgrade. Positive: The ratings are on a Rating Watch Positive. Future developments that may, individually or collectively lead to positive rating action include: --Completion of Softbank merger and expected uses for the $8 billion cash injection. --Plans for post-close capital structure. --The degree of operational, strategic, and legal linkage between Softbank and Sprint Nextel. --Trends associated with operating performance for postpaid subscribers, churn, and ARPU. --Sprint Nextel's continued progress with network modernization plans including cost improvements and LTE network deployment.
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