September 4, 2013 / 6:52 PM / 4 years ago

Fitch Rates Sprint Nextel's Senior Notes 'B+/RR4'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, September 04 (Fitch) Fitch Ratings has assigned a new Issuer Default Rating (IDR) to Sprint Corporation (Sprint) of 'B+' and a 'B+/RR4' rating to Sprint's benchmark-sized offering of senior unsecured notes due 2021 and 2023. The proceeds from the offering will be used for general corporate purposes, which may include redemptions or service requirements of outstanding debt, network expansion, and modernization. The Rating Outlook is Stable. A full list of ratings follows at the end of this release. The senior notes will be fully and unconditionally guaranteed on a senior unsecured basis by Sprint's wholly owned subsidiary, Sprint Communications, Inc. Concurrently with this offering, Sprint will fully and unconditionally guarantee on a senior basis the outstanding securities issuances of Sprint Communications Inc., Sprint Capital Corporation and iPCS, Inc. Consequently, Fitch believes Sprint has created a guarantee structure such that the senior notes issued at Sprint Capital Corp., Sprint Communications Inc. and Sprint are pari passu. Key Rating Drivers The rating affirmation reflects Fitch's view that Sprint's financial profile will remain weak through 2014 due to the significant cash deficit during the next two years and the associated debt borrowing that will increase leverage. Sprint estimated this deficit at approximately $10 billion in its June 2013 proxy filing driven by $16 billion in capital investment to keep pace with growing industry demand and the competitive environment. Fitch believes the cumulative $28 billion in capital spending the next four years also reflects the underinvestment in Sprint's network and the need to accelerate the deployment of capital to improve Sprint's competitive position. Additionally, DISH's pursuit of Sprint and Clearwire had a negative impact on Sprint's available liquidity for other strategic initiatives of $4.7 billion. Looking forward, as Sprint leverages it cost reduction efforts, substantial margin expansion should occur in the 2014 and 2015 timeframe. Cost reduction efforts could drive up to $2 billion in savings. The improved cash generation when coupled with reduced capital investment should allow for the company to strengthen its financial profile, including the potential to generate free cash flow (FCF) by 2015. Leverage is expected to approach 5.5x by the end of 2013 before declining in 2014. Operational Trends Sprint also faces material execution risk across the numerous strategic objectives that the company is pursuing. Fitch remains concerned with Sprint platform gross additions trends which, when adjusted for Nextel subscriber recapture, declined in excess of 20% for the past four quarters. Consequently, postpaid revenue growth which had increased to approximately 6% during late 2011 to mid-2012, declined modestly year-over-year for the first half of 2013. During this time, Sprint prioritized its marketing spend for the recapture of its iDEN subscribers and Verizon Wireless took share by leveraging its 4G LTE leadership position across its national footprint. Sprint will continue to face postpaid subscriber headwinds for the remainder of 2013 due to the continued negative impact from mixed accounts (iDEN and Sprint platform), network vision-related churn and lack of density with its long-term evolution (LTE) footprint. As such, postpaid revenue will remain pressured and Sprint will need to find ways to reinvigorate growth in 2014 as competitive intensity remains high among the national and wholesale providers for postpaid subscribers. The accelerated network investment to improve capacity, data bandwidth and customer experience is a key strategic component of Sprint plans. The company hopes that the improved network when combined with its differentiated unlimited plan and Softbank's expertise will increase its share of industry gross additions. Fitch believes Verizon and AT&T Wireless are currently much better positioned to leverage their scale, capital investment, subscriber bases and spectrum portfolios to capture additional share and future growth, particularly through the share data plans. These plans will likely result in even stickier subscribers as consumers attach more devices, creating further barriers to churn. Consequently, Sprint's challenge is magnified, as industry postpaid and prepaid additions are expected to contract further as the industry matures. Additional avenues for incremental revenue growth include mobile broadband/tablet devices and machine-to-machine opportunities. Spectrum Softbank's cash infusion materially strengthened Sprint's flexibility to pursue key consolidation and spectrum opportunities. Fitch views Clearwire's network and spectrum assets as integral to Sprint's LTE plans to deploy high-band spectrum in high-capacity areas, particularly within the urban cores under Sprint's control. This strengthens Sprint's long-term competitive position and ability to offer a differentiated unlimited wireless broadband plan versus its national peers. Given Sprint's deep 2.5 GHz spectrum position and unbalanced spectrum portfolio, Fitch believes Sprint could pursue opportunities to swap/sell 2.5 GHz spectrum and increase its holdings of other spectrum bands including the sub 1 GHz band through the 600 MHz broadcast auction. This would enhance Sprint's financial flexibility and allow for an expanded 2.5 GHz device ecosystem. An H-block auction in the 2014 timeframe could also increase Sprint's expected deficit if the company materially participates in the auction. Liquidity, Maturities & Financial Covenants Sprint's liquidity position is supported by $6.4 billion of cash and $2.1 billion borrowing capacity under a revolving credit facility. Softbank contributed an additional $1.9 billion of cash at closing and Sprint paid $3.8 billion related to the Clearwire transaction. Sprint closed a new five-year $3 billion credit agreement earlier this year. As of June 30, 2013, $913 million in letters of credit were outstanding. Sprint also maintains a second tranche of a $500 million vendor financing facility that became available for borrowing on April 1, 2013. Fitch expects Sprint will maintain at least $2 billion of cash going forward to maintain adequate liquidity for its strategic plans. As such, given the high cash requirements to fund the operating deficit related to the capital investment, the Clearwire acquisition and potential spectrum auction, Fitch expects Sprint will substantially increase debt during the next year. Debt refinancing and redemptions have significantly reduced Sprint's maturity profile (excluding Clearwire) from previous years. During the next four years, $56 million, $292 million, $611 million and $2,111 million comes due, respectively. Sprint will consider opportunities to refinance Clearwire's high-coupon debt. Clearwire has $2.95 billion of 12% first-priority secured notes due December 2015. The secured notes currently have optional redemption rights at 106%. This will reduce to 103% in December 2013. The $500 million 12% second priority notes are due in 2017 with optional redemption rights beginning December 2014 at 106%. The $300 million 14.75% first priority secured notes mature in the fourth quarter of 2016 and contain a make-whole premium, thus limiting refinancing options. Financial covenants with the new credit facility have significant cushion against the expected leverage increase with current total leverage ratio not to exceed 6.25 through June 30, 2014. As of March 31, 2013, the leverage ratio was 4.25. The unsecured credit facilities at Sprint benefit from upstream unsecured guarantees from all material subsidiaries. The credit agreement allows carve-outs for indebtedness composed of unsecured guarantees that are expressly subordinated to the credit facility. The unsecured junior guaranteed debt is senior to the unsecured notes at Sprint Nextel and Sprint Capital Corporation. The unsecured senior notes at these entities are not supported by an upstream guarantee from the operating subsidiaries. The $1 billion vendor financing facility is jointly and severally borrowed by all of the Sprint subsidiaries that guarantee the Sprint credit facility, Export Development Canada loan and junior guaranteed notes. The facility additionally benefits from a parent guarantee and first priority lien on certain network equipment. This places the vendor facility structurally ahead of the unsecured notes. RATING SENSITIVITIES/DRIVERS Positive: Future developments that may, individually or collectively, lead to a positive rating action include: --Execution on cost reduction opportunities leading to expansion in operating EBITDA margins approaching 20%; --Improvement in cash generation such that FCF prospects for the year are approaching breakeven to positive; --Improved FFO interest coverage approaching 4x; --Improved FFO adjusted leverage approaching 4x; --Additional infusions of capital by Softbank; --Improvement in postpaid churn by at least 10-20 basis points; --Positive trends in gross addition share. Negative: Future developments that may, individually or collectively, lead to negative rating action include: --Lack of an expected turn-around in FCF generation with persistent negative trends; --Aggressive spectrum purchases that would raise leverage over 5.5x on a sustained basis; --Postpaid subscriber trends materially weaken; --Gross addition share gains fail to materialize; --Additional material acquisitions. Fitch affirms the ratings of Sprint Corporation and its subsidiaries as follows: Sprint Communications Inc.; --IDR at 'B+'; --$3 billion senior unsecured credit facility at 'BB/RR2'; --Junior guaranteed unsecured notes at 'BB/RR2'; --Senior unsecured notes at 'B+/RR4'. Sprint Capital Corporation; --IDR at 'B+'; --Senior unsecured notes at 'B+/RR4'. Fitch assigned the following new ratings: Sprint Corporation; --IDR at 'B+'; --Senior unsecured notes at 'B+/RR4'. Contact: Primary Analyst Bill Densmore Senior Director +1-312-368-3125 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst David Peterson Senior Director +1-312-368-3177 Committee Chairperson Michael Weaver Senior Director +1-312-368-3156 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Parent and Subsidiary Rating Linkage' (Aug 8, 2012); --'Rating Telecom Companies: Sector Credit Factors' (Aug. 9, 2012). Applicable Criteria and Related Research: Rating Telecom Companies here Parent and Subsidiary Rating Linkage Fitch’s Approach to Rating Entities within a Corporate Group Structure here Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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