Moody's Investors Service Friday downgraded telecommunication company Sprint Nextel Corp.'s (S) Corporate Family Rating to Ba2 from Ba1, noting that the company's ability to stem the deterioration of its earnings is taking longer than initially anticipated. The rating agency said that the company's leverage, therefore, is likely to deteriorate before stabilizing at much weaker levels than previously expected, and added that its outlook for Sprint Nextel's ratings is negative.
Moody's analyst Dennis Saputo attributed the rating downgrade to "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."
The company's probability of Default Rating was also downgraded to Ba2 from Ba1.
The agency noted that the Overland Park, Kansas-based Sprint Nextel's pre-paid operations are performing relatively well, partly due to weak economic conditions, while 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.
Saputo added, "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."
As of September 30, 2009, Sprint Nextel had approximately 48.3 million wireless customers, including wholesale and affiliate subscribers.
Earlier, on October 19, Moody's had affirmed its Ba1 corporate family rating and negative outlook in connection with Sprint's announced plans to acquire iPCS, an affiliate, for about $831 million.
Further, Moody's affirmed the Baa2 rating of the company's bank credit facility, citing the recently announced full repayment of revolving loans, and added that it believes that this facility will remain undrawn. The agency also affirmed the Ba2 rating of Nextel Communications' debt, reflecting the structural seniority of these notes relative to other unsecured debt. Moody's also attributed the affirmation of Nextel's debt rating to its belief that the financial profile of Nextel will continue to benefit from the strong performance of the Boost prepaid product.
According to Moody's, Sprint Nextel's strong liquidity profile and ability to continue generating robust free cash flow has supported the ratings over the last year. The company increased its cash balances by over $2.2 billion, mainly through cost reductions and efficiency gains, including a significantly reduced headcount, together with very low capital investment, while its debt levels were kept flat so far this year.
However, the rating agency said it expects liquidity to deteriorate from very strong levels as the company funds recently announced strategic initiatives, including its $1.2 billion investment in Clearwire and the acquisitions of Virgin Mobile and iPCS, and free cash flow generation becomes more difficult.
Moody's noted that it expects Sprint's 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. Free cash flow generation, therefore, is expected to decline in 2010.
Saputo stated, "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. These two providers present a particularly significant challenge to Sprint Nextel's ability to stem defections of its highly profitable post-paid subscribers."
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.
In addition, Moody's has affirmed Sprint Nextel's SGL-1 speculative grade liquidity rating, citing the agency's expectation that the company will sustain very good liquidity over the next twelve months. The SGL-1 rating considers Sprint Nextel's large cash balances of approximately $5.9 billion as of September 30, solid free cash flow from operations and manageable debt maturities of $1.75 billion in 2010. The agency believes that the company will be successful in extending its credit facility before it expires in December 2010.
Moody's pointed out that the company's manageable debt maturities has been 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.
Approximately $23 billion of debt is affected, Moody's noted.
S closed Friday's regular trading session at $3.76, down $0.09 or 2.34%, on a volume of 61 million shares.
For comments and feedback: editorial@rttnews.com