Moody's Downgrades Leap Wireless's Debt Ratings

Published on: 27th Feb 2013

­Moody's Investors Service has downgraded USA based Leap Wireless's debt ratings following its expectations that both churn and capital intensity will remain high, causing leverage to increase. The outlook is stable.

Moody's said that Leap's debt rating reflects the Company's high leverage, weak operating performance and the intensely competitive nature of the U.S. wireless industry where penetration is already 100%.

"The challenges associated with being a small operator in an industry that is increasingly dominated by large national network providers are becoming more difficult, if not impossible, to overcome," said Dennis Saputo, Moody's Senior Vice President.

Moody's expects the Company will experience declining revenues and consume cash over the next few years given our expectations for continuing subscriber losses, some of which are due to the Company's decision to exit unprofitable service offerings. While Moody's believes that recent management initiatives will lead to improved execution, increased competition from Sprint, T-Mobile USA and the other large operators is expected to keep churn high.

"Leap's iPhone commitment also represents a potentially significant overhang on the Company's financial strength as it could be required by Apple to purchase above the Company's current iPhone sales rate to meet the minimum purchase commitment," continued Saputo. The rating is supported by the Company's valuable spectrum assets and good liquidity.

Leap's stable outlook reflects Moody's belief that recent strategic and operational changes will enable the Company to preserve its operating margins which will allow the Company to minimize the impact of the continuing subscriber losses.

The rating could be lowered if liquidity weakens appreciably or if Leap's strategic changes fail to realize the anticipated benefits, particularly with churn and margins. Specifically, if EBITDA margins (Moody's adjusted) were to drop below 25% (which Moody's believes would happen if churn doesn't decrease and market share doesn't stabilize within a couple of quarters), the ratings would be at risk.

While unlikely in the near-term, a rating upgrade would result if leverage were likely to remain below 6.0x and the company returns to positive free cash flow on a sustainable basis while preserving good liquidity.

 

Tags: [leap wireless]  [USA]