Leap Wireless Outlook Moved from Negative to Stable by Debt Ratings Agency
Moody's Investors Service says that it has assigned a Ba2 rating to Leap Wireless' proposed $400 million term loan B offering. The debt will be issued by Leap's wholly owned subsidiary, Cricket Communications and will be used to pay down Cricket's $300 million unsecured notes due 2015, with the remaining cash to be used for general corporate purposes.
Moody's has also changed Leap's outlook to stable from negative reflecting its belief that very recent strategic and operational changes will be successful in improving margins and eventually turning the business free cash flow positive.
Leap's B2 Corporate Family Rating (CFR) reflects the Company's weak competitive position, small scale, high leverage and long period of inconsistent operating performance. The U.S. wireless industry is dominated by the large national operators since this is a business where size matters. "And, with every person in the country who wants a cell phone having one, the challenges associated with carving out a profitable niche business will become more difficult for Leap over time," stated Dennis Saputo, Moody's senior vice-president.
Moody's projects that Leap will lose about 180,000 subscribers in 2012.
Management has taken several actions that the ratings agency expects will increase margins and provide a clearer path to eventual free cash flow generation. In addition to various product offering enhancements and pricing changes, the Company is significantly reducing spending on national retail outlets, focusing instead on a smaller number of more effective channels.
"We view this development as positive since we have long believed that the Company didn't have the operational breadth to support a profitable national strategy," continued Saputo.
Leap also realizes that handset device selection is a pivotal deciding factor in attracting and retaining customers. To address that, Leap became the first prepaid carrier to offer the iPhone in June of this year, and also has emphasized more offerings of quality mid-to-high end smartphones. And, the Company expects to offer 3 4G LTE devices by year-end 2012. Although these higher-end smartphones come with large subsidies, Moody's believe that these devices will result in margin expansion since they lead to better customer retention and require higher ARPU smartphone plans. Moody's also believe that Leap's Muve Music offering is a unique offering that offers the Company the opportunity to differentiate its services.
Leap has also made changes to its network modernization plans in order to improve profitability and capital efficiency. And, although management has reduced capital spending guidance by 13% for year-end 2012, the Company expects to deploy LTE across approximately 21 million covered POPs by year-end 2012 and anticipates covering at least two-thirds of its network footprint over the next two to three years. Leap is investing heavily on its 4G LTE network in order to remain competitive and lower operating costs. Consequently, Moody's said that it expects capital spending will average above 15% of revenues over the next couple of years.
"Moody's believes this reduced investment plan will still result in negative free cash flow until year-end 2014 at which time we expect the Company will become free cash flow positive," concluded Saputo.