Fitch Rates Sprint Nextel's Unsecured Notes 'BB'; Outlook Negative

Fitch Ratings has assigned a 'BB' rating to Sprint Nextel's US$500 million senior unsecured notes due August 2017. The net proceeds will be used for general corporate purposes. The Outlook is Negative.

Fitch said that Sprint Nextel's ratings reflect the challenges that the company has encountered while attempting to stabilize its operations as well as the limited visibility into future operating trends. Fitch believes the company will experience difficulties in regaining its market share of postpaid subscribers, given the high industry penetration rates, the low postpaid churn rates of its national competitors, the weak economy and its competitive position.

The ratings are supported by Sprint Nextel's liquidity position, which is a strength of the company given its cash position, current level of free cash flow and availability under its credit facility. Cash at the end of the second quarter of 2009 was $4.6 billion, free cash flow was $1.5 billion for the first six months of the year and available liquidity under its bank credit facility was $1.5 billion.

The high level of liquidity effectively addresses Sprint's sizable near-term maturity profile, which includes $600 million due January 2010, $750 million due June 2010, $1 billion of outstanding credit facility debt due December 2010 and $1.7 billion due January 2011. In addition, Sprint will retire all of the Virgin Mobile debt outstanding at the time of closing, which is expected in the fourth quarter of 2009 or first quarter of 2010. At the end of March 31, 2009, outstanding debt net of cash at Virgin Mobile was approximately $250 million. Sprint Nextel also has pension contribution payments required in 2009 in the range of $100 to $200 million. In May 2009, Sprint Nextel repaid $600 million of maturing debt.

The notes will be issued under the Sprint Nextel 2006 indenture. Consequently, the terms and conditions of the debt issuance are similar to past debt offerings. However, additional new terms of these notes would potentially require Sprint Nextel to repurchase the notes upon a change in control. Sprint Nextel currently has sufficient cushion under its maximum leverage covenant. As of June 30, 2009, the ratio was 3.1 times (x) compared to the covenant of 4.25x.

Fitch continues to remain concerned with Sprint's operating results.

While postpaid losses improved sequentially in the second quarter of 2009, the magnitude of the postpaid subscriber losses remains substantial as the company has averaged subscriber losses of over one million for the past six quarters. The weak economy, Sprint's weak brand image and competitive environment continue to create significant headwinds, which has negatively impacted business churn and limited Sprint's ability to improve gross additions. Sprint's indication that further expected improvement in postpaid performance will be gradual reflects the challenging market conditions and creates uncertainty over the level of future net addition improvement despite the benefits of an upgraded device lineup. Positively, while Boost unlimited prepaid subscribers greatly exceeded Fitch's expectations and provided a modest offset to the decline from non-Boost EBITDA, the competitive environment has intensified for this market segment due to the expansion of new competing products and aggressive service plan pricing on enhanced calling features by other carriers. Consequently, future subscriber growth and profitability could be challenging after the initial demand is met from Boost's nationwide deployment.

While current subscriber trends are somewhat worse than Fitch's initial expectations, the company's EBITDA generation remains in line with Fitch's current forecast due in part to better stability from expected ARPU and effective cost cutting measures. Free cash flow (FCF) levels are substantially higher than initial expectations, largely through lower capital spending. Failure to substantially reduce current postpaid subscriber trends and offset these losses with profitable Boost unlimited subscribers will result in further declines in revenue and operating cash flow that will negatively impact FCF and ultimately liquidity.

Until Sprint Nextel shows greater progress in stabilizing its operations, Fitch will continue to assess these measures to determine whether further rating actions are warranted.

Posted to the site on 10th August 2009