Fitch Downgrades Sprint Nextel's IDR to 'BB'; Outlook Negative
Published on: 19th Feb 2009
Note -- this news article is more than a year old.
Debt ratings agency, Fitch has downgraded Sprint Nextel's Issuer Default Rating (IDR) to 'BB' with a negative outlook. Fitch says that Sprint Nextel's downgrade is reflective of the significant continued revenue declines primarily due to the high subscriber losses as well as the limited visibility over the timing and the extent of how overall operating trends might improve during 2009. In particular, the iDEN operations have continued a sharp deterioration of its operating metrics.
Fitch believes Sprint Nextel will continue to experience challenges with stabilizing the iDEN operating results going forward given its niche appeal, the weak business economy and subscriber migration.
While Sprint Nextel believes past customer experience issues with customer care, network quality and retail distribution have been largely resolved and are on-par with its peers, the company's competitive position also remains weak due to lagging perception issues, brand challenges and past advertising spend levels. The positive momentum experienced by its financially stronger competitors, Verizon Wireless and AT&T Wireless, and the general economic downturn creates a significant headwind for Sprint Nextel to increase its share of gross additions in order to stabilize its subscriber base.
In addition, churn while modestly improved during the past two quarters, remains too high and a significant barrier to sustainable net subscriber growth. Fitch also believes that a prolonged and deeper economic recession could have a more pronounced negative effect on Sprint Nextel's subscriber base.
As an offset to the above operating concerns, Sprint Nextel's liquidity position is a current strength of the company given its cash position, free cash flow and availability under its credit facility. Cash at the end of the fourth quarter of 2008 was $3.7 billion. Management has stated a desire to keep significant cash balances to ensure sufficient liquidity to repay upcoming debt maturities, which are sizable. Debt maturities during the next three years include $600 million of debt due in May 2009, $600 million of debt due in January 2010, $750 million of debt due in June 2010, $1 billion credit facility debt due in December 2010 and $1.7 billion of debt in January 2011.
Sprint Nextel has a $4.5 billion senior unsecured revolving credit facility maturing in 2010 with $2.1 billion letters of credit outstanding. During the fourth quarter 2008, Sprint Nextel negotiated amendments to the credit facility thereby giving the company greater flexibility. Credit facility availability at the end of the fourth quarter of 2008 was $1.4 billion. Despite the significant erosion in revenues, Fitch expects the company will generate a material level of free cash flow in 2009 due to a reduction in capital spending and the rationalization of the cost structure, which provides more of a net cash benefit in the latter part of the year. However, if Sprint Nextel fails to stabilize operating trends, free cash flow (FCF) prospects could become significantly constrained over time. FCF for 2008 was approximately $1.7 billion and leverage increased to 2.8 times (x) compared to 2.1x at the end of 2007.
The Negative Outlook reflects Fitch's concern with the continued limited visibility into whether the company's current turnaround initiatives will stabilize operating trends during 2009. Sprint Nextel also faces as an uncertain outcome relative to the resolution of the iPCS litigation by January of 2010. Failure to show improvements in operational metrics during the first half of 2009 will likely result in a further ratings review to assess the potential ratings impact. In 2008, Sprint Nextel lost approximately 4 million postpaid subscribers as gross additions contracted in excess of 35%.
Fitch estimates that Sprint Nextel's postpaid gross addition market share has reduced in share size to approximately 12% from the low 20s in 2007.
In respect to the iDEN operations, the past erosion to all facets of the iDEN business has caused significant degradation to its cash flow generation. While the company has reiterated its support and commitment to the iDEN platform, Fitch expects the company will continue to struggle with adding iDEN only postpaid subscribers. Consequently, Fitch remains concerned about the longer-term economic viability of the iDEN business due to further postpaid subscriber losses and whether Boost unlimited subscribers will provide a tangible positive offset to the postpaid iDEN losses. Therefore, Fitch will continue to monitor the operational prospects of the iDEN assets and the potential implications of further subscriber erosion to assess the level of risk to Nextel bondholders.