Fitch Affirms Sprint Nextel's IDR at 'BB+'; Outlook Negative
Published on: 22nd May 2008
Note -- this news article is more than a year old.
In addition, all of the ratings have been removed from Rating Watch Negative. The Rating Outlook on Sprint Nextel and its subsidiaries is Negative. Approximately $23 billion of debt is affected by Fitch's action.
The rating affirmation considers the past deterioration to Sprint Nextel's credit metrics and the continued challenged financial performance resulting from numerous operational issues. Additionally, the past consumer sentiment toward Sprint Nextel and the positive momentum experienced by Verizon Wireless and AT&T Wireless exacerbate the challenges that the company faces in improving its competitive position, particularly considering the high industry postpaid penetration rates and weakening economy.
While first-quarter operating performance was within the lowered expectations, churn, ARPU and subscriber addition metrics were all at their lowest points since the merger with further pressure expected on ARPU throughout at least 2008. As a result, wireless revenue and EBITDA declined by 9% and 25%, respectively, in the first quarter. Sprint has indicated that postpaid subscriber declines will only improve marginally in the second quarter. The company expects to be free cash flow positive for the balance of the year with EBITDA performance stabilizing by year end.
Over at least the medium term, the WiMAX partnership Sprint Nextel announced on May 7, 2008 is positive by mitigating the financial risks associated with costs to build-out and operate a new network. Sprint Nextel will also be reimbursed for any WiMAX capital and operating costs from April 1 until the transaction closes with a mix of cash and secured promissory notes. In addition, in Fitch's view this will give management more time to focus on addressing the challenges within its core operations.
The Negative Outlook reflects Fitch's concern with the limited visibility into whether the company's current turnaround initiatives will stabilize the operations. Sprint Nextel also faces uncertain outcomes relative to iPCS litigation and spectrum rebanding, which could further affect the company's operations, both financially and operationally. Based on the above factors, if Sprint Nextel cannot show material improvements in operational metrics during the second half of 2008, a one-notch downgrade is likely as credit metrics would experience further erosion beyond current expectations. At the end of first-quarter 2008, leverage (Total Debt/Adjusted EBITDA) was 2.4 times (x). Fitch expects leverage to rise to approximately 3x by the end of 2008.
As a result of its past operational difficulties and reflecting the deterioration in financial performance, Sprint Nextel took steps to conserve liquidity and reduce refinancing risk. These actions included the suspension of its $300 million annual dividend and a $2.5 billion drawdown on its revolver. Cash and marketable securities at the end of first-quarter 2008 was $4.8 billion. Current maturities include $1.3 billion due in November 2008 and $600 million due in May 2009. The 2008 maturity was recently called for redemption. Pro forma for the $337 million reduction in the letter of credit (LOC) and $50 million commercial paper repayment subsequent to the end of the first quarter, Sprint Nextel had approximately $1.2 billion of borrowing capacity under its $6 billion credit facility that matures in 2010. Fitch expects the company to potentially seek further reductions to its $2.2 billion LOC as additional progress is made with spectrum rebanding.
While Fitch does not expect Sprint Nextel to breach its credit facilities financial covenant of 3.5x in the near term, further erosion to its subscriber operating metrics during 2008 will materially reduce its covenant cushion. As of the first quarter, the financial covenant ratio was 2.9x. Because of these factors, Fitch believes the company will likely enter into discussions with its bank group at some point to negotiate amendments to its credit facilities or potentially refinance to a new facility with a longer dated maturity. If this were to occur, the bank group could likely require any of the following: fee increases, more restrictive covenants, reduction to commitment, or guarantees and/or security interests in Sprint Nextel operating subsidiaries. Fitch believes the company has limited flexibility in the near term to reduce the overall size of its facility given the recent drawdown and on-going LOC requirements. Bond indentures effectively restrict secured debt to standard carve-outs plus 15% of net tangible assets. Absent any further credit deterioration or events beyond current expectations, if Sprint Nextel's credit facility became secured, Fitch would expect to maintain its current IDR ratings and increase the notching of the credit facility to reflect its priority position in the capital structure.
At the completion of the merger in 2005, Sprint Nextel Corp. jointly and severally guaranteed the Nextel obligations on a senior unsecured basis. The supplemental indenture also allowed that Sprint Nextel could be released from its guarantee upon the sale of substantially all of Nextel's assets. At this time, Fitch believes the Sprint Nextel Corp. guarantee to Nextel's unsecured senior notes is fully supported since: the integration is effectively complete with the billing system conversion; and Sprint Nextel remains currently committed to the iDEN network to deliver Direct Connect Push-To-Talk (PTT) services.
However, Fitch remains concerned with the past erosion to all facets of the iDEN business that has caused significant degradation to its cash flow generation and the uncertain longer-term commitment to the iDEN platform due to the new deployment of the QChat PTT services on CDMA. If the company continues to struggle with adding iDEN-only subscribers, which Fitch believes is likely, Sprint Nextel could face mounting shareholder pressure over the challenges associated with the iDEN business, although any disposition of the iDEN assets would be challenging and uncertain. Potential barriers include: the current level of integration, the prohibitive costs to shutter the iDEN network, the viability of a standalone iDEN business, and spectrum rebanding issues. Fitch will continue to monitor the operational prospects of the iDEN assets and the potential implications of further subscriber-base erosion to assess the level of risk to Nextel bondholders.