MOODY'S LOWERS SPRINT CORPORATION'S LONG-TERM RATINGS TO Baa1 ON ANNOUNCEMENT OF SPRINT PCS RESTRUCTURING
New York, 05-27-98 -- Moody's Investors Service downgraded the senior unsecured long term debt ratings of Sprint Corporation (Sprint) and Sprint Capital Corporation to Baa1 from A3, and the senior unsecured long term debt ratings of Carolina Telephone & Telegraph Company to A1 from Aa3 in order to reflect the additional financial burden assumed by Sprint Corporation and its operating subsidiaries in association with the Sprint Spectrum partnership restructuring. Moody's also upgraded the Sprint Spectrum L.P. senior secured rating to Ba1 from B1 and its senior unsecured rating to Ba2 from B2 due to the management control of the entity by Sprint Corporation and the resulting closer integration with the existing Sprint service offerings. In addition, the rating changes take into account the financial benefits of a consolidated entity and the contribution of the increase in equity support for outstanding debt due to the Initial Public Offering of tracking stock. Sprint Corporation's Prime-2 commercial paper rating and the long term debt ratings of the other telephone operating subsidiaries are confirmed.
The ratings downgraded are:
Sprint Corporation's senior unsecured debt, to Baa1 from A3, the company's shelf registration, to (P)Baa1 from (P)A3, and the long term counterparty rating to Baa1 from A3;
Sprint Capital Corporation's senior unsecured debt to Baa1 from A3, and the company's shelf registration to (P)Baa1 from (P)A3;
United Telecommunications Inc. senior unsecured debt to Baa1 from A3; and
Carolina Telephone and Telegraph Company's senior unsecured debt, to A1 from Aa3, and the company's senior unsecured shelf, to (P)A1 from (P)Aa3.
The ratings upgraded are:
Sprint Spectrum's L.P. senior secured debt, to Ba1 from B1, and the company's senior unsecured debt to Ba2 from B2.
The ratings confirmed are:
Sprint Corporation's short term commercial paper debt, rated Prime-2;
Sprint Capital Corporations short term commercial paper debt, rated Prime-2;
Centel Capital Corp.'s senior unsecured debt, rated Baa1;
Central Telephone Co.'s senior secured MTN program, rated A1;
United Telephone Company of Florida's senior secured debt, rated A1;
United Telephone Company of Ohio's senior secured debt, rated A1, and the company's senior secured shelf, rated (P)A1; and
United Telephone Company of Pennsylvania's senior secured debt, rated A2.
The consolidation of Sprint PCS with Sprint Corporation, and an anticipated refinancing of Sprint PCS's secured debt and vendor financing by Sprint Corporation, will have a negative impact on the credit statistics of the combined entity. The additional financial burden will decrease Sprint Corporation's financial flexibility and increase the strain on its cash flows. Significant external financing will be required to support the capital expenditure program of both Sprint and Sprint PCS and we expect this will be done through the Sprint Capital Funding vehicle. This entity finances on the basis of a direct, unconditional, irrevocable guarantee of Sprint Corporation.
Sprint Corporation's Baa1 senior unsecured long term debt rating also considers the strong and stable cash flows from Sprint's core telephony operations, as well as the continuing drain on earnings due to the company's investments in Global One and other emerging businesses such as the out-of-region competitive local exchange carrier strategy.
The restructuring will give Sprint Corporation full management and operational control of Sprint PCS and will reduce the business influence of the existing partners to that of financial investors. By contributing SprintCom to the Sprint PCS partnership, Sprint Corp.'s ownership percentage in the wireless enterprise will be increased to 53%. Sprint will then undertake an initial public offering of Sprint PCS's tracking stock, selling as much as 10% of the ownership to the public. This will provide the cable partners with liquidity and allow Sprint to take full management control. Sprint Corporation will eventually be restructured into two separate publicly traded stocks, one which reflects wireline operations performance and one that tracks all wireless activities.
The restructured wireless entity is expected to realize some operational synergies which will improve the overall performance of Sprint PCS and, with the expanded nationwide coverage footprint, provide an increased competitive advantage for Sprint. Additionally, the interest expense savings associated with the expected refinancing of Sprint PCS debt and the financing of the ongoing external borrowing requirements at the Sprint Corporation credit rating level are expected to be significant. The combination of the two wireless operations, Sprint PCS and SprintCom, along with the existing and future wireline capabilities of the organization enhances the bundling and cross-selling strategy currently in place. Moody's would anticipate a more aggressive posture toward integrating the wireless offering into Sprint Corporation's current service offerings.
Sprint PCS's Ba1 rating incorporates the managerial and operational support to be gained from Sprint and the strategic nature of the wireless operations to Sprint Corporation's overall business strategy. Sprint PCS continues to add subscribers at rates above the industry average. In addition, the average revenue per unit is high and has not deteriorated as quickly as anticipated. While subscriber growth has been negatively impacted by delays in the original roll-out schedule, revenue growth has been impressive nonetheless.
Cost containment is proving to be a more difficult task and operating losses are expected to remain significant. Sprint Corporation can be expected to run the wireless operation with tighter cost controls specifically focusing on reducing not only subscriber acquisition costs and but also general operating expenses. Additionally, the tax advantages of the consolidation allow for additional savings to be used by Sprint. Single management control will provide clear leadership and avoid the problems associated with multiple strategic interests caused by differing financial resources at each of the partners.
Sprint Corporation is a global telecommunications company, headquartered in Westwood, Kansas. Sprint Spectrum L.P. is a nationwide wireless telecommunications provider, headquartered in Kansas City, Missouri.
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