CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed 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 is Stable. A full list of ratings follows at the end of the release.
KEY RATING DRIVERS
Increased 2.5GHz Portfolio Transparency
The affirmation reflects Sprint's expected offering of up to $3.5 billion in wireless spectrum-backed notes with varying maturities. The notes are being issued pursuant to a $7 billion program establish for this structure. Fitch expects the spectrum-backed notes program will inject substantial liquidity into Sprint with proceeds from this offering used for general corporate purposes including upcoming senior notes maturities. Sprint plans to contribute 2.5 GHz licenses and 1.9 GHz licenses representing approximately 14% of Sprint total spectrum holdings on a MHz-pops basis. The spectrum portfolio is currently utilized by approximately 77% of all of Sprint's 2.5 GHz enabled sites and approximately 33% of Sprint's 1.9 GHz enabled sites.
The affirmation of Sprint's issue ratings considers that while the expected securitization carves out a material portion of spectrum, Fitch believes the improved transparency with Sprint's 2.5 GHz spectrum portfolio has allowed Fitch to increase the underlying asset value estimate relative to our prior recovery analysis for Sprint. Fitch incorporated discussion and market values provided by third party consultants along with comparable sales and auction data. Fitch's revised recovery valuation also reflects the uncertainties related to a distressed market transaction by appyling an applicable discount. Consequently, Fitch believes the Recovery Ratings on the loan and bond instrument ratings have not changed within Sprint's capital structure including an average recovery expectation ('RR4' = 31%-50%) for the senior notes.
SoftBank Support Key
Fitch's rating of Sprint is primarily supported by the material benefit Sprint's IDR receives from SoftBank's tangible support, which essentially sets a floor to the rating at 'B+'. Additionally, Fitch does not perceive SoftBank's support toward Sprint as having changed or lessened. The Mobility Leasing Solutions LLC (MLS) structure combined with the network equipment sale leaseback and unsecured bridge facility, which are more short-term oriented, leverages SoftBank's extensive and deep financial relationships have been a credit positive injecting substantial liquidity thus, demonstrating further tangible support of Sprint. Fitch views the operational and strategic linkages are moderately strong given the operational and strategic business oversight while the legal linkages are weak given the lack of any guarantees provided to existing debtholders.
Weak Standalone Profile
Fitch views Sprint's standalone rating as 'B-' and expects the rating will remain weak for an extended period due to the time required to address the numerous executional and operational challenges. As such, Sprint has focused significant attention on raising liquidity through several sources to fund these operating deficits and upcoming debt maturities. Rating concerns would increase if Sprint's operational improvements do not materialize or fall short of expectations during the next 18-24 months since material continued operating deficits would require further significant increases in debt through asset monetizations or secured debt beyond FY2017. Consequently, Fitch believes some risks would exist that at a future date SoftBank could reassess its level of support if the turnaround strategy does not gain sufficient traction.
Substantial Maturity Wall
Sprint's upcoming maturities are substantial. Thus, the proposed wireless spectrum-backed notes financing is a critical piece and is expected to serve as a longer-dated financing to begin addressing Sprint's maturity wall. Debt maturities, during the next three years total approximately $8.4 billion, including $3.6 billion, $1.7 billion and $3.1 billion in fiscal 2016, 2017 and 2018, respectively. Debt maturities include notes and credit facilities only and exclude network leaseco, MLS-2, capital leases and other obligations. The $2.2 billion of network leaseco debt matures in staggered, unequal amounts through January 2018 with the first principal payment of approximately $300 million due in March 2017.
Beyond FY2018, maturities total in excess of $10 billion during the next four years. A failure to execute on current strategic plans to improve the cash generation and position the company to reduce debt materially over the long term increases the risk that Sprint's capital structure becomes unsustainable. Expectations are that Sprint will address the revolving credit facility maturity in the coming months before the revolver becomes current. Fitch also anticipates the bridge facility will no longer be required once Sprint successfully completes the initial tranche of wireless spectrum-backed notes.
Key Operational Trends
Sprint faces several challenges, including ongoing operating deficits, significant execution risk surrounding Sprint's numerous strategic initiatives and operational trends. The competitive intensity and market maturity within the wireless industry along with the much stronger financial profiles and good execution of its peers only serve to amplify this risk. The operational imperatives include cost structure, network, gross addition share, post-paid churn and brand. Sprint has seen improvement and stabilization within its operating profile through cost reduction efforts, improvement in network performance, stabilization of post-paid gross addition share while improving post-paid handset mix and reducing post-paid churn.
Given recent operating results, Fitch expects that Sprint is on track to at least modestly grow revenues in fiscal 2016 but will need to sustain the momentum in light of the aggressive competition and promotional service plans that begin to roll-off over time. Thus, while current progress is encouraging, substantial work remains as negative consumer brand perceptions and the competitive environment present significant headwinds.
Right Sizing Cost Structure
Sprint's top operational priority is right sizing the cost structure to improve the cash generation of the company. During the second fiscal quarter 2015, Sprint announced plans to reduce at least $2 billion in costs on a run rate basis by the end of fiscal 2016. The current cash cost to achieve is expected to be $1 billion, split equally between operational expenses and capital expenditures with most restructuring costs occurring in FY2016. Fitch believes the company has relatively good line of sight and is on track to achieve $2 billion or more of exit run savings by the end of fiscal 2016. Fitch believes further cost reduction opportunities will continue after this current program end resulting in further cash restructuring charges.
Network Performance Gap Closing
Through SoftBank's technical support, Sprint has significantly improved the performance of the LTE network with improved reliability, capacity and speed through its triband spectrum deployment (1.9GHz, 800MHz, and 2.5GHz), two-channel (2x20 MHz) carrier aggregation utilizing the 2.5GHz band and smart antenna technology. As part of these upgrades, Sprint has increased its network densification of 2.5 GHz spectrum to approximately 200 million POPs. Sprint is also in the process of deploying three-channel carrier aggregation to further boost network speeds and capacity. In order to better leverage the improved network performance and enable top-line growth, Sprint has evolved its marketing message in an effort to address the negative consumer perceptions with Sprint's network.
Leverage, Covenants & Guarantees
Sprint's leverage (debt / EBITDA) as of June 30, 2016 was 4.3x. Given the substantial distortion with financial metrics related to the accounting for leases and installment billing, Fitch does not view reported EBITDA based metrics as an accurate measure of financial risk. With Softbank's implied support reducing the importance of Sprint's standalone financial position, Fitch believes a more relevant metric to measure progress would be FCF generation. For fiscal 2016, Fitch anticipates a FCF deficit adjusted for net proceeds from device financings in the range of $500 million.
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.
Sprint's vendor financing facilities are jointly and severally borrowed by all of the Sprint subsidiaries that guarantee its revolving credit facility, Export Development Canada loan and junior guaranteed notes. The facilities additionally benefit from parent guarantees and first priority liens on certain network equipment. This places the vendor facilities 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 an unconditional guarantee to the 2040 exchangeable notes.
Sprint has substantial flexibility under its bond indentures and credit agreement to pursue additional funding through permitted securitizations, liens arising in connection with sale and leaseback transaction or liens on capital assets and inventory. The credit agreement also does not contain any restrictions on the total size of such agreements. Under its bond indentures, Sprint has a carve-out for permitted liens up to 15% of consolidated net tangible assets. Sprint has approximately $2.3 billion of secured capacity after netting the revolving facility, bridge commitments, 9.25% debentures and Export Development Canada loan.
Fitch's key assumptions within its rating case for the issuer include:
--Post-paid gross addition share flat to FY2015;
--Post-paid churn of approximately 1.5%;
--EBIT in the lower $1 billion range;
--FY2016 FCF deficit after adjusting for net proceeds of device financings in the $500 million range;
--Total proceeds of up to $7 billion to be issued from the wireless spectrum-backed notes program;
--Sprint to maintain minimum cash of at least $2 billion over forecast period.
Fitch does not view an upgrade as likely at this time given the execution risk around its many initiatives. Future developments that may, individually or collectively, lead to a positive rating action include:
--Sustained post-paid gross addition share in upper-teen range with strong mix of post-paid prime handset additions;
--Sustained improvement in churn to below 1.3%;
--Material positive net post-paid additions with sustained improvement in net porting ratios;
--Executing on guidance for long-term improvements in cost structure;
--Sustained improvement in network operating performance;
--The improved operating trends above drive financial results that mostly exceed Fitch's current expectations for revenue, EBITDA, FFO, CFO, FCF and leverage. These improvements would lead to increased confidence and transparency around Sprint's ability to generate material levels of FCF in order to reduce debt.
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 post-paid additions, handset 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 into FY2017;
--Changes in the level or the expectations for support from SoftBank that materially affects the operating and financial profile of Sprint;
--Challenges with successfully raising funds in future financing transactions that negatively affect Sprint's liquidity position;
--If Fitch believes Sprint will continue material deficits beyond FY2017 that will require Sprint to seek additional liquidity through core asset monetizations.
Sprint has taken several steps during the past several months to bolster liquidity. As of June 30, 2016, Sprint's liquidity position was $10.6 billion supported by $5.1 billion of cash and short-term investments, $3 billion in borrowing capacity under its $3.3 billion revolver that matures in 2018 and $2.5 billion under an unsecured bridge financing facility that matures in October 2017. In the past year, Sprint has raised $2.2 billion in network-related financing and completed two sale-leaseback transactions related to iPhones with Mobile Leasing Solutions, LLC (MLS) that provided an upfront cash infusion in excess of $2 billion. Fitch believes the MLS transactions are an important step toward creating a consistent funding source to mitigate the negative working capital effects associated with the leasing model.
Sprint expects to execute future sales leaseback transactions for leased handsets on a quarterly basis that is expected to provide $2 billion to $4 billion of funding in fiscal 2016 depending on the amount of leasing sales. Sprint also maintains a $4.3 billion securitization facility that matures November 2017. The receivables facility consists of $2 billion for leasing, $1.3 billion installment and $1 billion service receivable sales. Additionally, Sprint has $1.1 billion of availability under vendor financing agreements that can be used toward the purchase of 2.5GHz network equipment.
FULL LIST OF RATINGS
Fitch has affirmed the ratings of Sprint Corporation and its subsidiaries as follows:
--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 at 'B+';
--Senior unsecured notes at 'BB+/RR1';
--First priority senior secured notes at 'BB+/RR1'.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Adjustments for lease and equipment installment plan accounting differences along with a discretionary discount to determine cash EBITDA that was used for the recovery analysis;
--Financial statement adjustments for adding back the portion of off-balance sheet receivables securitization and MLS tranche 1.
Additional information is available at 'www.fitchratings.com'.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)
Dodd-Frank Rating Information Disclosure Form
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