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. A full list of ratings follows at the end of the release.
KEY RATING DRIVERS
SoftBank's Support Key to Sprint's Rating
Fitch's affirmation of Sprint with a Stable Outlook 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 diminished during the past year. The Mobility Leasing Solutions LLC (MLS) structure combined with the expected network financing structure that leverages SoftBank's extensive and deep financial relationships are a credit positive overall and are expected to inject substantial liquidity on an on-going basis, 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.
These financing structures will result in an increase with overall debt particularly as Sprint monetizes network related assets, which could be viewed negatively. However, Sprint greatly benefits from the cost effective access to substantial liquidity with the financing structures that are expected to be repeatable. In addition, these financing structures enable Sprint to continue substantial network investments that are critical to improving its competitive position and inject further financial discipline into Sprint's operations. If Sprint were on a stand-alone basis, the company would have experienced much greater challenges with executing such agreements that could have materially affected both its business and financial profiles.
Heightened Execution Risk
Sprint faces several challenges including increased liquidity requirements to fund the business, operational trends that have shown some improvement but still remain subpar, and significant execution risk surrounding Sprint's numerous strategic initiatives. The competitive intensity and market maturity within the wireless industry combined with the much stronger financial profiles and good execution of its peers only serves to increase this execution risk. Given these challenges, 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 core subscriber metrics during FY2016.
Standalone Profile Weak, Substantial Deficit Continues
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 numerous executional and operational challenges. As such, Sprint will need additional liquidity to fund these operating deficits. Rating concerns would increase if Sprint's operational improvements do not materialize or fall short of Fitch's expectations during the next 12 to 18 months since the resulting cash drain would require further material 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 then reassess its level of support to address further shortfalls.
Substantial Maturity Wall
Sprint's upcoming maturities are substantial and create a more pressing need to close the deficit during the next two years. Debt maturities during the next three years total approximately $9 billion including $155 million remaining in FY2015, $3,675 million in FY2016, $1,677 million in FY2017 and $3,127 million in FY2018. Fitch expects the handset leasing and network financing structures to address the funding shortfalls including the majority of refinancing requirements in FY2016 and FY2017. 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 produce a significant level of FCF by FY2018 to reduce debt materially increases Sprint's financial profile risk.
Key Operational Trends
Fitch believes Sprint must make meaningful improvement through strong execution on the following top five operational imperatives to drive improved revenues and increased cash flows to generate sustainable FCF. The operational imperatives include cost structure, network, gross addition share, postpaid churn and brand. Sprint has made material progress in the past year through cost reduction efforts, improvement in network performance, stabilization of postpaid gross addition share while improving postpaid handset mix and reducing postpaid churn. Fitch believes that while current progress is encouraging, significant work remains as negative consumer brand perceptions and the competitive environment present significant headwinds.
Leverage, Covenants & Guarantees
Sprint's leverage (debt / EBITDA) as of Dec. 31, 2015 was 4.2x. 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. Fitch conservatively estimates leverage, after accounting for leases and installment billing adjustments, at greater than 7x. 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.
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 $2.8 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 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. After netting the revolving facility and Export Development Canada loan, Sprint has approximately $4.5 billion of secured capacity.
Fitch's key assumptions within the rating case for the issuer include:
--Postpaid gross addition share flat to FY2015;
--Postpaid churn of approximately 1.5%;
--Net postpaid additions in excess of 1.5 million;
--EBITDA of $9.4 billion;
--Cash restructuring costs of approximately $1 billion;
--FY2016 FCF deficit to exceed $4 billion without consideration from additional MLS-like transactions;
--Network financing funding in excess of $4 billion;
--Additional handset leasing funding in excess of $3 billion;
--Minimum cash liquidity of about $2 billion.
Future developments that may, individually or collectively, lead to a positive rating action include:
--Sustained postpaid gross addition share in upper-teen range with strong mix of postpaid prime handset additions;
--Sustained improvement in churn by at least 20 basis points;
--Material positive net postpaid additions with sustained improvement in net porting ratios;
--Permanent cost structure improvements in excess of $2 billion;
--Continued improvement in network operating performance that further closes the gap to its national peers;
--The improved operating trends above drive financial results that mostly exceed Fitch's current expectations for revenue, EBITDA, CFO, FCF and leverage. These improvements should lead to sustainable FCF generation that would be used to materially 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 postpaid 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 during FY2016;
--Changes in the level or the expectations for support from SoftBank that materially affects the operating and financial profile of Sprint;
--If either the leasing or the expected network financing structures are not available to support on-going liquidity requirements;
--If Fitch believes Sprint will continue material deficits beyond FY2017 that will require Sprint to seek additional liquidity through similar core asset monetizations that the company is currently pursuing.
Current Liquidity Sufficient:
As of Dec. 31, 2015, Sprint's liquidity position was approximately $6 billion supported by $2.2 billion of cash and short-term investments, $3 billion in borrowing capacity under its $3.3 billion revolver that matures in 2018 and approximately $800 million of undrawn capacity under its $4.3 billion accounts receivable facility. Sprint has flexibility with managing it accounts receivable program by determining the amount of cash it chooses to receive from each receivable sales. As of Dec. 30, 2015, the secured equipment facility had $960 million outstanding with total available borrowing capacity of almost $600 million with approximately $500 million of additional availability in April 2016.
In November 2015, Sprint completed the first sale-leaseback transaction related to iPhones with MLS that provided an upfront cash infusion of $1.1 billion. Fitch views this as an important step toward mitigating the negative working capital effect associated with the leasing model. Fitch believes Sprint will maintain about $2 billion of cash to ensure adequate liquidity.
Leasing, Network Financing Critical for Liquidity:
Sprint's LTM free cash flow deficit was $4.4 billion without consideration for the $1.1 billion in net cash proceeds from the sales leaseback transaction in December. Drivers for the deficit include the negative working capital effects from the substantial ramp-up with the handset leasing receivables and equipment installment receivables, capital expenditures, high cost structure and various competitive responses.
Through the next two years, Fitch expects Sprint will continue to experience a FCF deficit in the range of $4-5 billion. As such, Sprint will need to seek funding primarily through handset and network leaseco structures, accounts receivable securitization and other funding structures that are permitted under Sprint's credit agreement. The expected cost structure enhancements of at least $2 billion are key to improving the deficit although cash restructuring costs of approximately $1 billion creates a material headwind. Fitch expects material cash restructuring costs could continue after FY2016.
FULL LIST OF RATING ACTIONS
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'.
Additional information is available on www.fitchratings.com
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