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16 Jun 2003
MOODY'S AFFIRMS ALL SPRINT CORP. (AND SUBSIDIARY) RATINGS. OUTLOOK IS CHANGED TO STABLE FROM NEGATIVE.
New York, June 16, 2003 -- Moody's Investors Service has affirmed the long-term debt
ratings of Sprint Corp. (sr. unsec. Baa3) and subsidiaries
(A3 to Baa3, see list below). The outlook on all ratings
was raised to stable from negative.
The outlook change reflects: 1.) Sprint's conversion
from negative to solidly positive free cash flow, 2.) debt
reduction resulting from the SPA (Sprint's directories business)
sale and Moody's expectation that free cash flow to debt metrics
will further improve and strengthen Sprint's balance sheet;
3.) Sprint's recovery from operational issues stemming from
ClearPay churn as PCS monthly churn has trended below 3.0%
after peaking at 3.8% in the third quarter of 2002;
and 4) addressing of liquidity concerns that existed last year.
In addition, the Baa3 rating reflects: 1.) significant
and stable cash flows originating from Sprint's 8 million local
access lines; 2.) Moody's expectations of continued
revenue growth and margin improvement at PCS Group; 3.) successful
cost containment at the company's long distance unit, Global
Markets Division ("GMD"); 4.) solid liquidity
profile characterized by light near-term debt maturities,
high cash balances, backup credit and undrawn receivables facilities,
and projected consolidated free cash flow; 5.) continued debt
reduction to compensate for the business risk inherent in PCS and GMD;
and 6.) improving corporate governance initiatives. Notably,
the rating also is based on Moody's expectation that Sprint will
not elect to contribute capital to support its PCS affiliates, two
of which are currently in bankruptcy or in default of their debt,
and that the probability that all the affiliates will be able to successfully
force Sprint to purchase their businesses is low.
After years of heavy investment in its wireless and long distance unit,
Sprint achieved free cash flow of around $2 billion for the twelve
months ended March 2003. The improvement was due to continued strong
cash flow from its local segment, approximately breakeven cash flow
from GMD, and considerably smaller cash burn from PCS. While
a significant portion of the improvement came through reduction in capital
expenditures, Moody's expects capital expenditure levels to
remain at or below current levels. The GMD network has excess capacity
to absorb, and PCS investment in the 1XRTT upgrade is largely complete.
While affirming the company's ratings and indicating rating stability
during the 12 to 18 month outlook period, Moody's recognizes
Sprint has several fundamental challenges. Sprint's two biggest
fundamental challenges center on the struggling long-distance industry
and the intensely competitive wireless sector. Several long-distance
services are in secular decline like consumer voice, private line,
and dial-up Internet, and this continues to drive Sprint's
consolidated wireline segment (i.e., FON) revenues
lower. Data and IP backbone services are growing, but these
are still small overall revenue contributors and face competition from
AT&T, MCI and various other competitors. PCS, on
the other hand, competes in a growing but competitive segment of
the industry. Since beginning operations in 1997, PCS has
grown its customer and revenue base at double-digit compound annual
growth rates. This level of growth is now over and the company's
focus must shift from growth to improving costs while striving to differentiate
itself from the competition. Though not without some key competitive
advantages, the company must execute its challenging business plan
as the nation's number four wireless operator. Despite's
these challenges, Moody's ratings and outlook for Sprint assume
no major disruptions to the company's already announced business
Sprint also must deal with the distressed financial condition of several
of its wireless affiliates and the diversion caused by corporate governance
oversights by the board regarding the use of the company's auditor
to provide personal tax advice to its former CEO and several other company
executives. Sprint is presently being sued by iPCS, an affiliate
that has already filed for bankruptcy. The lawsuit accuses Sprint
of breaching the management agreement, which, if upheld by
a judge, would allow iPCS to put its business at 88% of the
fair market value to Sprint. While Moody's is unable to assess
the legal merits of this case, the aggregate level of financial
distress among the company's affiliates and the potential remedies
that may be required to keep at least the most strategic affiliates operating
is concerning. Moody's rating and outlook for Sprint assume
that the affiliates will, in general, accomplish debt restructurings
with minor investments and concessions from Sprint and, in general,
will be unable to successfully prove breach of the management agreement
and force Sprint to purchase its assets. Furthermore, Moody's
expects the affiliates to continue to operate. Any setback on this
front could have rating implications. The board's decision
to release its former CEO and former COO represented tough actions that,
at a minimum, suggest the board is more concerned about issues of
corporate governance than previously was the case. Nonetheless,
the dismissal of these senior executives was a serious disruption to the
strategic operations of the company and, complicating matters,
new CEO, Gary Forsee, became entangled in a dispute with his
former employer. Forsee is now in charge and the board is focusing
on setting high standards for corporate governance; already significant
changes have been adopted to improve board oversight. Moody's
views both of these developments positively but will withhold further
judgement until demonstrated and sustained progress has been made on the
company's stated corporate governance initiatives (in particular,
how the company responds to areas of significant investor concern,
such as executive compensation and auditor independence) and Mr.
Forsee has established a track record.
Ratings affirmed include the following:
Sprint Corporation - senior unsecured long-term at Baa3;
short-term at P-3
Sprint Capital Corporation - senior unsecured long-term
at Baa3; short-term at P-3
United Telephone Co. of Florida - first mortgage bonds at
United Telephone Co. of Ohio - first mortgage bonds at A3
United Telephone Co. of Pennsylvania - first mortgage bonds
Carolina Telephone and Telegraph Company - senior unsecured long-term
Centel Capital Corp. - senior unsecured long-term
Central Telephone Co. - senior secured long-term
Sprint is a telecommunications company headquartered in Westwood,
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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