Fitch Expects to Rate Sprint Spectrum Securitization Series 2016-1 Class A Notes; Issues Presale

CHICAGO--()--Link to Fitch Ratings' Report: Sprint Spectrum Securitization

https://www.fitchratings.com/site/re/888857

Fitch Ratings expects to rate the up to $3.5 billion series 2016-1 class A notes to be issued by Sprint Spectrum Co LLC (the Master Issuer), Sprint Spectrum Co II LLC (Co-Issuer II) and Sprint Spectrum Co III LLC (Co-Issuer III) 'BBB', Outlook Stable. A full list of rating actions follows at the end of this release.

The issuance, which is the first out of a $7 billion program, will be backed by hell-or-high water lease payment obligations from Sprint Communications Inc. (SCI) which in turn are guaranteed by Sprint Corporation and all of SCI's subsidiaries that guarantee the Existing Credit Agreements. Additionally, as part of the financing structure, the wireless spectrum licenses that give right to the lease payments will be contributed to wholly owned subsidiaries of the issuing entity (true sale). The financing will also be collateralized by a pledge of the equity of the license holding entities and certain transaction accounts. Notes will be rated to timely payment of interest and ultimate payment of principal by the legal maturity date. Legal final maturity is 18 months after the expected maturity of the A-3 notes.

The rating reflects; SCI's Issuer Default Rating (IDR) of 'B+'; its Going Concern Assessment (GCA) score (GC 2); an Affirmation Factor of 'High' indicating the likelihood of the company's affirmation of the related lease obligations following a bankruptcy filing; an 18 month liquidity facility and recovery prospects. The rating is capped at the 'BBB' level given the lack of significant precedent, limited data related to valuations and uncertainties as to the timing of foreclosure and recoveries.

KEY RATING DRIVERS

Credit Quality of the Lessee: Cash flows backing the transaction will come from hell-or-high water lease payment obligations from SCI. The IDR of the Lessee acts as the starting point for the analysis. SCI, a wholly owned subsidiary, of Sprint Corporation, is rated 'B+', Outlook Stable.

Performance Risk and Going Concern Assessment Score: Timely payment on the bonds may depend on the ongoing performance of Sprint as the Lessee. SCI's GC score of 2 acts, which acts as a cap for the assessment of Sprint continuing to operate, could allow for a 4 notch differential between the Sprint IDR and the issuance PD rating.

Strategic Nature of the Assets: Fitch considers the Affirmation Factor (i.e. the likelihood that Sprint would view this obligation as strategic and would affirm the lease in the event of a bankruptcy) as high. The strategic importance of the assets to Lessee's operations coupled with the structural incentives in place support this assessment. The assessment of high allows the transaction to obtain the maximum four notch uplift from the company's IDR which is commensurate with the GC 2 score.

Liquidity Facility in Place: The transaction benefits from an 18 month liquidity facility. This facility can be used if there is any disruption in lease payments during a Sprint bankruptcy or reorganization process. Additionally, the liquidity will be used in the case of lease rejection by Sprint in order to meet timely interest payments during the foreclosure, re-marketing, and sales process.

Recovery Potential: While sales proceeds are expected to be sufficient to repay all outstanding debt, even significantly stressed recovery levels would generate a high level of recovery on the notes. Fitch ran several stressed assumptions on the valuation with recoveries deemed Outstanding (greater than 90%) in the majority of all scenarios. This recovery benefit would allow the transaction to obtain a two notch benefit from the 'BBB-' PD rating. However, the rating was capped at 'BBB' for the reasons described below.

Transaction Rating Capped: Although the IDR of the corporate entity, the GCA score, the affirmation factor, and the potential recovery proceeds allow for a rating of 'BBB+', the lack of significant precedent, the limited data related to valuations and uncertainties related to the timing of foreclosure and recoveries, Fitch elected to cap the transaction rating at 'BBB'.

Back-up Manager Role: In Fitch's view, the role of Midland, a division of PNC Bank, N.A. ('A+'/Outlook Stable), as back up servicer and control party provides additional protections and safeguards related to the collateral. Given Sprint's role as the manager of the collateral, the backup manager protects investors from misaligned incentives. In addition to day to day oversight, the backup manager plays a key role related to the foreclosure process as in an event of a manager replacement event it will direct sale of the business and/or liquidation of collateral, with approval of Controlling Class Representative.

Asset Isolation and Legal Structure: Notes define default as occurring when an interest payment is missed (after the expiration of the liquidity facility) or in the event that full principal is not repaid at legal final maturity. However, the proposed structure contemplates events, such as lease payment default and manager termination events, in which the investors can dispose of the collateral before an event of default is declared. The trust structure used allows creditors to gain access to the collateral in the case of a collateral disposition event. These elements not only may increase overall recovery, but they increase the willingness of the Lessee to meet the monthly lease payments on a timely basis.

RATING SENSITIVITIES

Although the rating is sensitive to changes in the credit quality of SCI, the capped 'BBB' rating would be able to withstand a one notch downgrade of Sprint's IDR. However, a significant downgrade of SCI's IDR could lead to a downgrade of the notes. In addition, a change in Fitch's adjusted valuation of the collateral that would result in a reduction of the recovery prospect estimations may lead to a downgrade.

DUE DILIGENCE USAGE

No third-party due diligence was provided or reviewed in relation to this rating action.

Fitch expects to assign the following ratings:

--Series 2016-1 5 year class A-1 notes 'BBB'; Outlook Stable;

--Series 2016-1 7 year class A-2 notes 'BBB'; Outlook Stable;

--Series 2016-1 10 year class A-3 notes 'BBB'; Outlook Stable.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)

https://www.fitchratings.com/site/re/886006

Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 16 Jun 2016)

https://www.fitchratings.com/site/re/882401

Future Flow Securitization Rating Criteria (pub. 14 Sep 2016)

https://www.fitchratings.com/site/re/887175

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/883130

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013035

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013035

Endorsement Policy

https://www.fitchratings.com/regulatory

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or
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Contacts

Fitch Ratings
Primary Analyst
Andres de la Cuesta, +1-312-606-2330
Associate Director
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Maria Paula Moreno, +1-312-606-2399
Senior Director
or
Committee Chairperson
Kevin Duignan, +1-212-908-0630
Managing Director
or
Media Relations, New York
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com