CHICAGO--(BUSINESS WIRE)--Link to Fitch Ratings' Report: Sprint Spectrum Securitization
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.
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.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 16 Jun 2016)
Future Flow Securitization Rating Criteria (pub. 14 Sep 2016)
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001