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

CHICAGO--()--Fitch Ratings has assigned a 'B+/RR4' rating to Sprint Corporation's (Sprint) proposed benchmark-sized senior unsecured notes due 2024. The proceeds from the offering would 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. Sprint fully and unconditionally guarantees on a senior basis the outstanding securities issuances of Sprint Communications Inc., Sprint Capital Corporation, Clearwire Communications LLC 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 at least 2014 due to the significant cash deficit during the next two years and the associated debt borrowing that has substantially increased 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 $26 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. Looking forward, as Sprint leverages it cost reduction efforts, significant 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 by the end of 2015. Leverage is expected to be at upper end of the 5x range for 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 postpaid gross additions trends that were negatively affected in the past due to the recapture of its iDEN subscribers and aggressive LTE marketing by its competitors. Sprint will continue to face postpaid subscriber headwinds into 2014 due to the negative effect from mixed accounts (iDEN and Sprint platform), network vision related churn, competitive environment and lack of density with its 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. This includes Sprint's plans to deploy Clearwire's 2.5 GHz spectrum over the next several years to increase both capacity and bandwidth. The company hopes 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 monetize future growth, particularly through the shared data plans.

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.

LIQUIDITY, MATURITIES & FINANCIAL COVENANTS

For the third quarter of 2013, Sprint's liquidity position is supported by $7.5 billion of cash and short-term investments and $2.1 billion borrowing capacity under a five-year $3 billion revolving credit facility due 2018. Letters of credit outstanding were $915 million. Sprint also maintains a second tranche of a $500 million vendor financing facility that became available for borrowing on April 1, 2013. As of Sept. 30, 2013, up to $174 million was available through May 31, 2014.

Fitch expects Sprint will maintain at least $2 billion of cash going forward to maintain adequate liquidity for its strategic plans. Sprint's current cash position along with this most recent offering will help fund on-going operating deficits related to the capital investment and the expected auction for TV broadcast spectrum. Debt refinancing and redemptions have significantly reduced Sprint's maturity profile from previous years. During the next four years, $385 million, $704 million, $2,505 million and $2,402 million of debt comes due, respectively.

After considering the $6.5 billion offering Sprint raised in September 2013, the company disclosed there was risk that it would exceed the 6.25x leverage ratio at Sept. 30, 2013. Accordingly, Sprint obtained a limited waiver until Dec. 31, 2013 from each of the lenders under the credit facilities that allowed Sprint to exclude $4.5 billion of indebtedness from the leverage ratio calculation. This enabled Sprint to be in compliance with the financial covenant at 5.4x for Sept. 30, 2013. As a requirement under the waivers, Sprint maintained a segregated reserve account that was used to retire existing Clearwire indebtedness in December.

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 SENSITIVITY/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 free cash flow (FCF) prospects for the year are approaching breakeven to positive;

--Improved funds from operations (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 increase leverage over 5.5x on a sustained basis;

--Postpaid subscriber trends materially weaken;

--Gross addition share gains fail to materialize;

--Additional material acquisitions.

The ratings of Sprint Corporation and its subsidiaries are as follows:

Sprint Corporation;

--IDR at 'B+';

--Senior unsecured notes at 'B+/RR4'.

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'.

Clearwire Communications LLC

--IDR 'B+';

--Senior unsecured notes 'BB+/RR1';

--First priority senior secured notes 'BB+/RR1'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);

--'Rating Telecom Companies: Sector Credit Factors' (Aug. 9, 2012).

Applicable Criteria and Related Research:

Rating Telecom Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=811107

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Contacts

Fitch Ratings
Primary Analyst:
Bill Densmore, +1-312-368-3125
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
David Peterson, +1-312-368-3177
Senior Director
or
Committee Chairperson:
Michael Weaver, +1-312-368-3156
Senior Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Bill Densmore, +1-312-368-3125
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
David Peterson, +1-312-368-3177
Senior Director
or
Committee Chairperson:
Michael Weaver, +1-312-368-3156
Senior Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com