Fitch Rates Sprint's $1 Billion Senior Notes 'B /RR4'; Outlook Stable
The senior notes will be fully and unconditionally guaranteed on a senior unsecured basis by Sprint's wholly owned subsidiary, Sprint Communications, Inc.
KEY RATING DRIVERS
--Fitch views a strong strategic linkage exists between Softbank and Sprint given the numerous affirmative steps taken to strengthen the relationship since providing tangible support of a \$5 billion capital infusion at the time of the acquisition. As such, the ratings reflect that Softbank may consider additional financial assistance such as loans in the event Sprint required funding outside of current plans to develop its business. Thus, Softbank's implied support materially benefits Sprint's IDR and reduces the importance of Sprint's standalone financial position relative to the current ratings on Sprint's credit profile.
--Fitch believes Sprint's standalone financial profile has deteriorated to the low single 'B' rating. Sprint's financial profile will also remain weak for an extended period due to the time required to address the numerous executional and operational challenges which has caused the company to seek additional liquidity to fund operating deficits. Additionally, Sprint must combat an intense competitive environment that experienced more pricing actions during 2014 than at any other time and has continued into 2015.
--Previous Sprint management initiatives triggered several missteps which exacerbated Sprint's poor brand image, resulted in uncompetitive plan pricing, failed to take stronger actions to reduce the industry's highest cost structure, increased Sprint's exposure to a greater subprime mix and caused substantial network disruption thus causing the firm's turnaround strategy to stall. Consequently, churn has persisted above 2%, operations remain pressured, which caused declining trends in Sprint's operational and financial performance.
--Sprint has taken aggressive, positive actions since last August to completely realign Sprint's consumer value proposition, implement a creative iPhone leasing program, reduce their subprime exposure, target a \$1.5 billion cost reduction program and refocus the network infrastructure initiatives. Whether Sprint can sustain the initial momentum and continue to attract consumers in this ultra-competitive environment remains uncertain. Results in the past four months demonstrate progress toward improving customer experience and stabilizing subscriber trends as postpaid gross additions, postpaid prime/subprime mix, LTE network performance and porting ratios have improved.
However, other initiatives to decrease postpaid churn rates to competitive levels, improve LTE network performance on a national basis and address their bloated cost structure will take substantially more time. While still in the early stages, Sprint's agreement to broaden its direct distribution by leasing space in approximately 1,750 cobranded RadioShack stores could accelerate efforts to improve its competitive position in a cost effective way, thus allowing the company to close the distribution gap relative to its peers.
--The 2.5 GHz spectrum assets are integral to Sprint's long-term LTE plans. Sprint plans to deploy its high-band 2.5 GHz spectrum in high-capacity, urban core areas through the expansion of its TDD-LTE network and an expected complementary solution using carrier aggregation with its 1900 MHz PCS spectrum. This should strengthen Sprint's long-term competitive position and ability to offer a differentiated unlimited wireless broadband plan versus its national peers. The AWS-3 spectrum auction results also reflect the increased value in commercially available spectrum, thus highlighting Sprint's spectrum depth and carriers desire to potentially acquire spectrum to support rapidly growing data consumption.
However, while improved, Sprint's lagging LTE build-out and substandard network performance combined with other operators' aggressive LTE capital investment has caused the company to materially trail its peers. Consequently, Sprint remains at a significant competitive disadvantage across numerous metropolitan areas with offering comparable network data speeds and must attempt to focus its message on delivering the best value in wireless until they can close the network speed gap. This could mitigate Sprint's sizeable spectrum advantage during at least the next couple of years if not longer.
Fitch's key assumptions within Fitch's rating case for the issuer include:
--Leverage (Debt to EBITDA) to increase to the upper end of the 5x range by the end of 2015.
--FFO adjusted leverage to increase to the mid 6x range for 2015.
--EBITDA growth of 5% in 2015.
--FFO margin to be in the low double digit range in 2015.
--2015 FCF deficit to likely exceed \$5 billion.
--Minimum cash liquidity of about \$2 billion.
Sprint's LTM free cash flow deficit was \$3.6 billion. Previous rating expectations had considered 2015 as an inflection point where on a run rate basis, the FCF deficit would reach breakeven. However, with the FCF deficit likely to exceed \$5 billion in 2015, Sprint must address a material funding gap over the rating horizon. Drivers for the deficit include the effects of postpaid subscriber losses, cash capital expenditure timing, equipment installment billing program and various competitive responses.
Sprint has pursued multiple avenues to seek additional liquidity to finance its initiatives. As of Dec. 31, 2014, Sprint's liquidity position was approximately \$7.5 billion supported by \$3.7 billion of cash and short-term investments, \$2.8 billion in borrowing capacity under its \$3.3 billion revolver that matures in 2018 and \$1.0 billion available under its \$1.3 billion securitization facility that matures May 2016. Sprint had not yet sold any receivables to the conduit at the end of the latest fiscal quarter. This benchmark offering will bolster the cash position.
In December 2015, Sprint closed on \$2.1 billion of financing with three new vendor financing agreements that totaled \$1.8 billion and an existing \$300 million expansion under its export development Canada (EDC) loan facility that matures in December 2019 to \$800 million. The company is also in the process of expanding the receivable securitization to include installment billing and lease receivables. Net installment receivables and net leased devices totaled \$1.5 billion and \$900 million as of Dec. 31, 2014 with 77% of net installment receivables considered prime.
Sprint has fully drawn its \$1 billion secured equipment credit facility due in 2017. At the end of the third fiscal quarter, \$635 million was outstanding after a \$127 million semiannual principal repayment was made in September 2017. Fitch believes Sprint will maintain about \$2 billion of cash to ensure adequate liquidity. Sprint's upcoming maturities are \$127 million in FY2014 and \$754 million in FY2015. In FY016 and FY2017 the maturity towers become more sizeable at \$3.5 billion and \$1.3 billion respectively.
Leverage, Financial Covenants & Guarantees
In October 2014, Sprint amended the covenants in their revolving bank credit facility to modify, among other things, the leverage ratio (total indebtedness to adjusted EBITDA as defined by the credit facility) not to exceed 6.5x through the quarter ended Dec. 31, 2015 and 6.25x through December 2016. In December 2014, Sprint also amended agreements with lenders for both the EDC facility and secured equipment credit facility on similar terms as the revolving bank credit facility. On Dec. 31, 2014, leverage under the covenant was 5.1x.
The unsecured credit facilities at Sprint benefit from upstream unsecured guarantees from all material subsidiaries. The credit agreement allows carve-outs for indebtedness composed of unsecured guarantees that are expressly subordinated to the credit facility. The unsecured junior guaranteed debt is senior to the unsecured notes at Sprint Communications Inc. and Sprint Capital Corporation. The unsecured senior notes at these entities are not supported by an upstream guarantee from the operating subsidiaries.
The \$1 billion vendor financing facility is jointly and severally borrowed by all of the Sprint subsidiaries that guarantee the Sprint credit facility, Export Development Canada loan and junior guaranteed notes. The facility additionally benefits from a parent guarantee and first priority lien on certain network equipment. This places the vendor facility structurally ahead of the unsecured notes.
The Clearwire notes benefit from a full and unconditional guarantee by the Issuers' wholly-owned direct and indirect domestic subsidiaries that own the spectrum assets. In addition, Sprint Corporation and Sprint Communications Inc. provide an unconditional guarantee to the 2040 exchangeable notes.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Sustained gross addition share in mid-teen range with improved mix of prime subscribers;
--Sustained improvement in churn by at least 25 basis points;
--Positive net postpaid additions with sustained improvement in net porting ratios;
--Sprint meeting or exceeding expected reduction in cost structure of \$1.5 billion;
--Improvement in network operating performance that materially closes the gap versus national peers;
--The improved operating trends above drive financial results that mostly exceed Fitch's current expectations for revenue, EBITDA, FFO, CFO, FCF and leverage.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Lack of expected improvement in the operating metrics for gross addition share, churn, net postpaid additions, prime subscriber mix, net porting ratios and network operating performance that further degrades financial profile. Fitch would become more concerned with Sprint's ability to effectively compete in the marketplace if the company does not demonstrate and sustain material improvement in these core metrics during 2015;
--Changes in the level or the expectations for support from Softbank that materially affects the operating and financial profile of Sprint. If Sprint began selling core assets including spectrum as opposed to bolstering capital structure to address liquidity issues, Fitch would become concerned with Softbank providing further tangible support.
The ratings for Sprint Corporation and its subsidiaries are as follows:
--Senior unsecured notes 'B+/RR4'.
Sprint Communications Inc.
--Unsecured credit facility 'BB/RR2';
--Junior guaranteed unsecured notes 'BB/RR2';
--Senior unsecured notes 'B+/RR4'.
Sprint Capital Corporation
--Senior unsecured notes at 'B+/RR4'.
Clearwire Communications LLC
--Senior unsecured notes 'BB+/RR1';
--First priority senior secured notes 'BB+/RR1'.