CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms the 'B+' Issuer Default Rating (IDR) assigned to Sprint Corporation (Sprint) and its wholly owned subsidiaries Sprint Communications Inc. and Clearwire Communications LLC. The Rating Outlook for Sprint's ratings is Stable.
KEY RATING DRIVERS
--Fitch believes Softbank has taken important steps to improve the long-term strategic linkage between the two companies during the past year. Softbank has already demonstrated past tangible support with a $5 billion capital infusion. As such, the ratings consider that Softbank may provide additional financial assistance such as loans in the event Sprint required funding outside of current plans to develop its business. Thus, Softbank's implied support benefits Sprint's IDR and reduces the importance of Sprint's standalone financial position relative to the current ratings on Sprint's credit profile.
--Fitch believes Sprint's standalone financial profile has experienced significant deterioration from 'B+' to the mid to low single 'B' rating, which deviates substantially from previous expectations that Sprint would begin to improve its financial performance. Sprint's financial profile will likely remain weak for a longer timeframe than first contemplated due to the time required to address the numerous executional and operational challenges. Additionally, Sprint must combat an intense competitive environment that has experienced more pricing actions during 2014 than at any other time.
--Previous Sprint management initiatives triggered several missteps which exacerbated Sprint's poor brand image, resulted in uncompetitive plan pricing, failed to take stronger actions to reduce the industry's highest cost structure, increased Sprint's exposure to a greater subprime mix and caused substantial network disruption thus causing the firm's turnaround strategy to stall. Consequently, churn has persisted above 2%, operations remain pressured, which caused declining trends in Sprint's operational and financial performance.
--Sprint's new CEO took quick and aggressive actions in August 2014 to completely reposition Sprint's consumer value proposition, implement a creative iPhone leasing program, reduce their subprime exposure, target a $1.5 billion cost reduction program and refocus the network infrastructure initiatives. Early results demonstrate immediate and significant improvement in subscriber trends as postpaid prime/subprime mix and porting ratio improved. Other initiatives to address the network and cost structure will take substantially more time. Whether Sprint can sustain momentum and continue to attract consumers in this competitive environment remains uncertain as competitors will likely respond to future actions particularly if Sprint begins to take material share.
--The positive rating sensitivities place more significance on Sprint executing its new branding, marketing, network and cost initiatives to drive sustained operational improvement that would generate material benefits to Sprint's longer-term financial profile.
--Clearwire's spectrum assets are integral to Sprint's LTE plans to deploy high-band spectrum in high-capacity, urban core areas. This strengthens Sprint's long-term competitive position and ability to offer a differentiated unlimited wireless broadband plan versus its national peers. The on-going AWS-3 spectrum auction reflects the increased value in commercially available spectrum and highlights carriers desire to acquire spectrum to support rapidly growing data consumption. However, Sprint's lagging and subpar LTE deployment, other operators' aggressive deployment of additional LTE capital investment and the efficiency benefits associated with LTE Advanced technology to increase bandwidth throughput could effectively mitigate Sprint's sizeable spectrum advantage during at least the next several years if not longer.
Fitch remains concerned with Sprint's ability to effectively compete and sustain positive subscriber trends and operating performance until its LTE network quality is closer to its peers. As part of the plan to address the network issues, Softbank Group's chief network architect, Junichi Miyakawa, has been named technical chief operating officer responsible for overseeing the company's network and technology organization, including related strategy, network operations and performance.
Liquidity, Maturities
As of Sept. 30, 2014, Sprint's liquidity position was supported by $4.1 billion of cash, $1.2 billion of short-term investments and $2.4 billion borrowing capacity under its $3.3 billion revolver that matures in 2018. Sprint has fully drawn on its $1 billion secured equipment credit facility. At the end of the second fiscal quarter, $635 million was outstanding after a $127 million principal repayment was made during the quarter.
Sprint added to their liquidity in May 2014 with a new $1.3 billion securitization facility that matures May 2016. At quarter end, Sprint had not sold any receivables to the conduit and had $1.1 billion available under the facility. The company is in the process of expanding the receivable securitization to include installment billing and lease receivables. Sprint also expects to use additional vendor financing for its 2.5 GHz network build. Fitch believes Sprint will maintain about $2 billion of cash for adequate liquidity. Sprint's upcoming maturities are $754 million in 2015 and become sizeable in 2016 and 2017 at $2.6 billion and $3.1 billion respectively.
Sprint's LTM free cash flow deficit was $4.6 billion. Previous rating expectations had considered 2015 as an inflection point where on a run rate basis, the FCF deficit would reach breakeven. However, even with the expected decrease in capital spending driven by Softbank synergies and the steps taken to increase liquidity, Fitch now expects a material funding gap exists with Sprint's capital allocation plans for at least 2015 and 2016. Fitch anticipates 2015 FCF deficit to likely exceed 2014 levels due primarily to the effects of postpaid subscriber losses, cash capital expenditure timing, equipment installment billing program and various competitive effects.
Leverage, Financial Covenants & Guarantees
Sprint's weak financial performance will begin pressuring leverage metrics as leverage (Debt to EBITDA) was 5x at end of the second fiscal quarter 2015, a decline from approximately 6x at the end of 2013. Fitch now expects leverage will increase to the upper end of the 5x range by the end of 2015. FFO adjusted leverage, which better reflects the working capital usage related to the equipment installment billing program, is expected to increase to the mid 6x range for 2015. Fitch also estimates FFO margin will be in the low double digit range. The FFO leverage and profitability ratios are weak for a 'b' category financial risk profile.
In October 2014, Sprint amended the covenants in their revolving bank credit facility to modify, among other things, the leverage ratio (total indebtedness to adjusted EBITDA as defined by the credit facility) not to exceed 6.5x through the quarter ended Dec. 31, 2015 and 6.25x through December 2016. Previously the leverage ratio covenant was 6x through December 2014, 5.5x through June 2015, thereby reducing by .25x every quarter until 4x on December 2016. Sprint is also in the process of amending agreements with lenders for both the export development Canada facility and secured equipment credit facility on similar terms as the revolving bank credit facility.
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 Communications Inc. 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.
The Clearwire notes benefit from a full and unconditional guarantee by the Issuers' wholly-owned direct and indirect domestic subsidiaries that own the spectrum assets. In addition, Sprint Corporation and Sprint Communications Inc. provide a unconditional guarantee to the 2040 exchangeable notes.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Sustained gross addition share in mid-teen range with improved mix of prime subscribers;
--Sustained improvement in churn by at least 25 basis points;
--Positive net postpaid additions with sustained improvement in net porting ratios;
--Sprint meeting or exceeding expected reduction in cost structure of $1.5 billion;
--Improvement in network operating performance that materially closes the gap versus national peers;
--The improved operating trends above drive financial results that mostly exceed Fitch's current expectations for revenue, EBITDA, FFO, CFO, FCF and leverage.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Lack of expected improvement in the operating metrics for gross addition share, churn, net postpaid additions, prime subscriber mix, net porting ratios and network operating performance that further degrades financial profile. Fitch would become more concerned with Sprint's ability to effectively compete in the marketplace if the company does not demonstrate and sustain material improvement in these core metrics during 2015;
--Changes in the level or the expectations for support from Softbank that materially affects the operating and financial profile of Sprint. If Sprint began selling core assets including spectrum as opposed to bolstering capital structure to address liquidity issues, Fitch would become concerned with Softbank providing further tangible support.
Fitch has affirmed the ratings of Sprint Corporation and its subsidiaries as follows:
Sprint Corporation;
--IDR at 'B+';
--Senior unsecured notes at 'B+/RR4'.
Sprint Communications Inc.;
--IDR at 'B+';
--Unsecured credit facility at 'BB/RR2';
--Junior guaranteed unsecured notes at 'BB/RR2';
--Senior unsecured notes at 'B+/RR4'.
Sprint Capital Corporation;
--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' (May 28, 2014);
--'Parent and Subsidiary Rating Linkage' (May 28, 2014);
--'Telecommunications - Ratings Navigator Companion' (Nov. 17, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=947275
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