CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the ratings for Sprint Nextel Corporation and its subsidiaries as follows:
Sprint Nextel Corporation (Sprint Nextel);
--Issuer Default Rating (IDR) to 'B+' from 'BB-';
--Senior unsecured notes to 'B+/RR4' from 'BB-'.
Sprint Capital Corporation;
--IDR to 'B+' from 'BB-';
--Senior unsecured notes to 'B+/RR4' from 'BB-'.
Nextel Communications Inc. (Nextel);
--IDR to 'B+' from 'BB-';
--Senior unsecured notes to 'B+/RR4' from 'BB-'.
The ratings for the unsecured credit facility at Sprint Nextel reflect the application of Fitch's recovery methodology.
--Senior unsecured credit facility to 'BB/RR2' from 'BB-'.
The Rating Outlook on Sprint Nextel and its subsidiaries is Negative.
The rating downgrade reflects the increased credit risk, financially and operationally in the short to medium term, resulting from materially greater cash requirements associated with the iPhone and accelerated network vision plans. Consequently, financial leverage will increase significantly more than the previous ratings contemplated. Fitch expects leverage for Sprint to peak at approximately 5.0 times (x) during 2012 before an expected decline in the out years as the network modernization project progresses although certainty around timing and pace of any improvement is limited. Current leverage was approximately 3.3x at the end of the second quarter 2011.
Fitch also remains concerned with refinancing risk and views Sprint Nextel's liquidity position as constrained despite the current high levels of cash. Significant cash requirements during the next two years will cause the company to materially draw down its cash levels. Fitch now expects deficit spending in excess of $3 billion in 2012 due to iPhone related costs and capital spending for its network modernization and LTE deployment. Sprint has indicated plans for $10 billion in capital spending in 2012 and 2013.
The company's liquidity at the end of the second quarter 2011 was in excess of $5 billion, including $4.3 billion in cash. During the next three years, Sprint has $5.4 billion in debt maturities including $2.3 billion in 2012, $1.8 billion in 2013, and $1.4 billion in 2014. Fitch estimates Sprint's funding requirements will also be in excess of $5 billion in 2012. Consequently, Fitch believes Sprint needs to take steps to bolster its liquidity in the near term to remove this as a potential issue given all the execution and operational risk present. A failure to address the need for additional liquidity in a timely manner would result in a further ratings review.
The lack of a longer-term agreement with Clearwire leaves a significant strategic void in Sprint's longer-term 4G spectrum strategy. In particular, the company has indicated that its current spectrum position is sufficient through 2014. Clearwire's spectrum would enable Sprint to fill capacity related hot spot areas in its urban cores. Fitch expects that while a growing sense of urgency exists between the two companies to find common ground for a longer-term agreement, Sprint and Clearwire have been at odds when viewing desired solutions.
Absent a spectrum agreement, Fitch believes that Clearwire will have greater challenges in securing sufficient funding for its 4G/LTE plans. Likewise, Sprint would not have adequate spectrum to handle future capacity and bandwidth demands for its unlimited data plan users, which is currently a core operating strategy. Sprint's initial deployment of 4G/LTE will also use only 10 MHz of spectrum compared to more robust deployments with 20 MHz of spectrum by Verizon and AT&T. This will result in lesser performance relative to its peers. Longer term, Clearwire's spectrum would solve this problem. Consequently, Sprint will attempt to rely on its improved device lineup, unlimited value-priced plans, and improved brand image to maintain its competitive position.
The current ratings have limited flexibility for execution missteps, weakened core operational results, significantly higher cash requirements or lack of expected benefits from the network modernization project. Clearwire also presents event risk to Sprint in the event of several circumstances. This could include Clearwire filing for bankruptcy, Sprint acquiring Clearwire or Sprint making an unexpected capital contribution to Clearwire.
Fitch does not believe Sprint views the LightSquared agreement for spectrum hosting as a core 4G spectrum strategy given the significant risks and uncertainties facing LightSquared. This is strictly an opportunity to better leverage Sprint's network to drive incremental cash flow and gain access to cheaper capacity options than otherwise possible with its existing agreement with Clearwire. However, Fitch currently sees little value in this arrangement unless LightSquared clears significant regulatory hurdles within a relatively short time period.
Sprint's $2.1 billion unsecured revolving credit facility expires in October 2013. As of the end of the second quarter 2011, the company had $1.2 billion in letters of credit outstanding, leaving $900 million of borrowing capacity. Fitch expects Sprint will need to negotiate an amendment to the credit facility to give the company adequate cushion relief as iPhone related losses would cause the company to breech the covenant at some point in 2012. Additionally, beginning in April 2012, the ratio will reduce to 4.25x, and further reduce to 4x in January 2013.
Fitch conducts a customized analysis and assigns recovery ratings when an issuer's IDR is 'B+' or below, which is now the case for Sprint. This involves an estimation of post-default cash flow and applying a multiple to reflect the company's relative position within a sector. In Sprint's case, Fitch applied significant stresses to cash flow and the multiple value due to the current operational and financial risk.
The senior unsecured credit facility benefits from an upstream senior unsecured guarantee from all material subsidiaries. Consequently, Fitch has assigned a 'BB/RR2' rating, reflecting expectations for superior recovery prospects under a bankruptcy scenario. For the remaining unsecured debt, the waterfall analysis yielded a 'B+/RR4' reflecting an average recovery for the unsecured debt at each of the subsidiaries and parent.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Rating Global Telecom Companies: Sector Credit Factors' (Sept. 16, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Rating Global Telecoms Companies - Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205
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