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07 Jun 2002
MOODY'S DOWNGRADES SR UNSECURED LONG-TERM RATINGS OF SPRINT CORPORATION AND SPRINT CAPITAL FUNDING TO Baa3; SHORT-TERM RATING LOWERED TO P-3. SUBSIDIARY RATINGS LOWERED ONE NOTCH. OUTLOOK ON ALL RATINGS IS NEGATIVE.
Approximately $22 Billion of Debt Securities Affected.
New York, June 07, 2002 -- Moody's Investors Service downgraded the senior unsecured long-term
ratings of Sprint Corporation and wholly guaranteed Sprint Capital Corp.
(together, "Sprint" or "the company") to Baa3 from Baa2 and the
company's short-term ratings to P-3 from P-2.
Moody's also lowered the long-term ratings of Sprint's subsidiaries
by one notch (see list below). The outlook for all ratings is negative.
The downgrade reflects Moody's view that: 1) Sprint will not generate
material free cash flow as a percentage of total debt until 2004;
2) Sprint PCS ("PCS"), while growing, will continue to require
heavy capital spending; 3) the company's long distance segment,
GMG, is struggling to turn around in a difficult competitive environment
4) liquidity remains a possible concern until the company successfully
completes a new bank facility that provides capacity for maturing debt
and cash usage of the business, adjusted for the possible sale of
the company's directory business.
Sprint's rating outlook is negative. Moody's believes negative
rating pressure will exist until: 1.) the company's bank
facility closes; 2.) accounts receivables programs have closed
and funded; 3.) cash balances increase via a significant asset
sale or long-term capital market issuance; 4.) GMG
demonstrates a sustainable turnaround; and 5.) PCS turns from
a significant cash flow drain to a cash generator and produces sustainable
returns on investment.
Sprint's Baa3 rating incorporates the expectation that Sprint PCS will
continue to grow operating cash flow and that GMG's performance will stabilize.
Even so, Moody's believes the prospective likelihood of more aggressive
wireless competition, the substantial capital expenditure requirements
of PCS, and further long distance weakening, particularly
in consumer voice, could make it challenging to deliver strong free
cash flow over the next two years. The rating also reflects a degree
of overhang associated with PCS's 2 million subscribers that are held
in several highly-leveraged affiliates. While Sprint has
no ownership interest in these affiliates, the affiliate debt is
non-recourse, and Sprint has no obligation to purchase these
affiliates, Moody's believes that Sprint may determine to bring
some or all of them on balance sheet at some future date, although
it is not likely in the near-term while Sprint faces its own capital
Moody's believes Sprint will complete a new revolving credit facility
and renew its GMG accounts receivable securitization program. Moody's
understands that Sprint has recently closed on a new $500 million
PCS accounts receivable securitization program. Furthermore,
the company is considering selling its directories business ("SPA").
Moody's notes that senior unsecured bonds are effectively and structurally
subordinated to outstandings under accounts receivable programs,
projected to total about $1.4 billion, and to total
telco operating company debt of approximately $800 million.
Future increases in amounts of debt that are structurally senior and/or
secured could have a negative impact on senior unsecured ratings.
A sale of SPA for a large multiple of cash flow would significantly improve
the company's liquidity position, but Sprint would then lose the
cash flows associated with the business. At the margin, Moody's
expects the net effect on Sprint's debt-to-cash-flow
will not be material and, as such, would not have a rating
Sprint is the most functionally integrated of all U.S. telcos,
meaningfully operating in three distinct segments. Sprint PCS has
become a substantial contributor to the company's overall performance,
and represents its best growth opportunity. After years of spending,
PCS has begun to generate meaningful operating cash flow. Price
wars in the wireless industry have not taken hold, largely because
operators have used excess network capacity to bundle minutes, preserving
the top line but keeping capital expenditures high. As strong as
PCS' performance has been since it launched in the mid 1990's, the
company remains vulnerable to a wireless price war and continued pressure
to invest heavily in its network. The long distance segment,
which has historically been a major contributor to Sprint's overall performance
has been under pressure. While Sprint's Internet backbone carries
25% of global Internet traffic, the majority of GMG's revenues
come from voice long distance, a product that continues to decline
at a significant rate. Internet and enterprise data services have
growth potential, but pricing competition remains intense.
The third significant segment is its local access lines, which represent
slightly more than 20% of Sprint's projected 2002 revenues and
nearly 40% of operating cash flows. The business generates
stable, high margin cash flows, and provides a meaningful
platform for cross-selling wireless and long distance services.
These ILEC properties carry relatively modest debt loads, and represent
a source of capital through dividends to Sprint Corp.
The following ratings were lowered:
Ratings lowered include the following:
Sprint Corporation - senior unsecured long-term to Baa3
from Baa2; short-term from P-3 to P-2
Sprint Capital Corporation - senior unsecured long-term
to Baa3 from Baa2; short-term from P-3 to P-2
United Telecommunications Inc. - senior unsecured long-term
to Baa3 from Baa2
United Telephone Co. of Florida - first mortgage bonds to
A3 from A2
United Telephone Co. of Ohio - first mortgage bonds to A3
United Telephone Co. of Pennsylvania - first mortgage bonds
to A3 from A2
Carolina Telephone and Telegraph Company - senior unsecured long-term
to Baa1 from A3
Centel Capital Corp. - senior unsecured long-term
to Baa3 from Baa2
Central Telephone Co. - senior secured long-term
to A3 from A2
Sprint is a telecommunications company headquartered in Westwood,
Vice President - Senior Analyst
Moody's Investors Service
Moody's Investors Service
No Related Data.
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