Moody's Downgrades Sprint Nextel's Ratings; Outlook Negative

Moody's Investors Service has again downgraded Sprint Nextel's Corporate Family Rating to Ba2 from Ba1 because the company's ability to stem the deterioration of its earnings is taking longer than originally anticipated. Consequently, the company's leverage is likely to deteriorate before stabilizing at much weaker levels than previously expected.

The outlook for Sprint Nextel's ratings is negative.

Approximately $23 billion of debt is affected.

­According to Moody's analyst Dennis Saputo, "The downgrade of Sprint Nextel's rating reflects the company's continuing challenges in stabilizing its post-paid wireless operations, despite recognized improvements in customer service, amid intense competition and slowing industry growth."

While the company's pre-paid operations are performing relatively well, in part due to weak economic conditions, their earnings and cash flow contribution pales in comparison to the profitability of post-paid subscribers. Consequently, earnings pressure is likely to persist until the loss of post-paid subscribers decreases more significantly.

"Complicating Sprint's challenges in stabilizing the profitability of its post-paid operations is stubbornly high churn and an industry trend towards higher handset subsidies," continued Saputo.

Moody's affirmed the Baa2 rating of the company's bank credit facility due to the full repayment of revolving loans recently announced by the company. In addition, the rating agency believes that this facility will remain undrawn. Moody's also affirmed the Ba2 rating of Nextel Communications's (Nextel) debt, reflecting the structural seniority of these notes relative to other unsecured debt, and the rating agency's belief that the financial profile of Nextel will continue to benefit from the strong performance of the Boost prepaid product.

The company's strong liquidity profile and ability to continue generating robust free cash flow has supported the ratings over the last year. Noteworthy cost reductions and efficiency gains, including a significantly reduced headcount, coupled with very low capital investment (in part due to customer losses) has allowed the company to increase its cash balances by over $2.2 billion while keeping debt levels flat so far this year. However, Moody's expect liquidity to deteriorate from very strong levels as the company funds recently announced strategic initiatives, including its recently announced $1.2 billion investment in Clearwire and the acquisitions of Virgin Mobile and iPCS, and free cash flow generation becomes more difficult. The ratings agency added that is expects revenue growth to remain challenging, margin weakening to persist and capital investment to increase from the very low levels that are likely to be recorded this year. Consequently, free cash flow generation is expected to decline in 2010.

"The continued negative outlook for Sprint's ratings reflects Moody's concerns about Sprint's ability to stabilize its operating performance and earnings in the face of a maturing market and fierce competition, especially from AT&T and Verizon", continued Saputo. "These two providers present a particularly significant challenge to Sprint Nextel's ability to stem defections of its highly profitable post-paid subscribers", concluded Saputo. Moody's believes that downward rating pressure will persist until the company is able to stem the erosion of its competitive position and maintain market share.

Moody's has affirmed Sprint Nextel's SGL-1 speculative grade liquidity rating reflecting its expectation that the company will sustain very good liquidity over the next twelve months, proforma for the three transactions noted above which are expected to require about $2 billion of cash. The SGL-1 rating considers Sprint Nextel's large cash balances of approximately $5.9 billion at 9/30/2009, solid free cash flow from operations and manageable debt maturities of $1.75 billion (since reduced to $750 million with the announcement that it paid down $1.0 billion of the outstanding loan amount under its $4.5 billion revolving credit facility) in 2010. Moody's believes that the company will be successful in extending its credit facility before it expires in December 2010.

Posted to the site on 22nd November 2009