Fitch Maintains Sprint Nextel's Negative Outlook Due to Upgrade and iPhone Costs
Fitch Ratings has assigned a 'B+/RR4' rating to Sprint Nextel's latest debt offerings. This includes unsecured senior notes due 2020 and 2022.
The company intends to use the net proceeds from the notes offering for general corporate purposes, which may include, among other things, redemptions or service requirements of outstanding debt, network expansion and modernization and potential funding of Clearwire.
Fitch's rating outlook for Sprint Nextel and its subsidiaries is Negative.
The ratings for Sprint reflect the on-going execution risk both operationally and financially regarding several key initiatives that the company expects will improve cash generation, network performance and longer-term profitability. Risks include achieving expected cost benefits associated with its network modernization, improving its competitive position with its 4G deployment, maintaining postpaid CDMA subscriber trends, improving iPhone dilution rates and retaining its iDEN subscribers.
Second quarter results show the company has generally managed these risks with improved CDMA churn, strong ARPU growth, better than expected iDEN subscriber retention and accelerated iDEN network shutdown. Consequently, Sprint Nextel materially increased EBITDA guidance for 2012. However, execution risk and cash burn rates will increase materially in the coming quarters as Sprint advances on its multi-faceted plans. The company's performance during the next two to three quarters will be a strong indicator whether Sprint Nextel can successfully navigate these risks, improve profitability and remain competitive.
Sprint Nextel has significantly fortified its liquidity position and reduced medium-term refinancing risk since late 2011. The past two debt issuances and vendor financed secured credit agreement raised an additional $7 billion of financing. During this time, Sprint has also repaid $3.25 billion of maturing debt. The company's liquidity at the end of the second quarter 2012 was approximately $8 billion, including $6.8 billion in cash. In addition, up to $500 million is available through May 31, 2013 under the first tranche of the secured equipment credit facility. The current liquidity helps address Sprint Nextel's material cash requirements expected through at least 2013 which could be in excess of $5 billion due primarily to the network modernization project and iPhone rollout.
Sprint's $2.24 billion unsecured revolving credit facility expires in October 2013. Sprint negotiated an amendment to the credit facility to give it cushion relief into 2013, due to iPhone-related losses.
This latest issuance will allow Sprint to address its sizeable maturities during the next three years totaling approximately $4.8 billion. Maturities include approximately $800 million in 2013, $1.4 billion in 2014 and $2.6 billion in 2015. Fitch expects the company to continue opportunistically seeking debt refinancing to reduce maturity risk going forward. Sprint Nextel will also likely need to consider parameters for a new facility by the end of 2012 given the 2013 maturity.
The ratings have limited flexibility for execution missteps, weakened core operational results, significantly higher cash requirements, Clearwire event risk or lack of expected benefits from the network modernization project.
Fitch expects leverage for Sprint Nextel to peak in the low 5x range during 2012. As a result, Fitch will not remove the Negative Outlook during 2012. A stabilization of the Outlook could occur by mid-2013 if Sprint Nextel executes on stated objectives and the company demonstrates further operational and financial improvements.