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Rating Action:

Moody's assigns Baa3 to T-Mobile's proposed senior secured notes

10 Aug 2021

New York, August 10, 2021 -- Moody's Investors Service (Moody's) has assigned a Baa3 to T-Mobile USA, Inc.'s (T-Mobile) proposed senior secured notes expected to be issued in two tranches, a new 2052 issue and an add-on to the company's existing 3.600% senior secured notes due 2060. T-Mobile intends to use the net proceeds from the sale of these new senior secured notes, together with cash on hand, to redeem the company's 4.500% Senior Notes due 2026 and 4.500% Senior Notes due 2026-1 held by Deutsche Telekom AG (DT, Baa1 stable), which has majority voting control of T-Mobile US. All other ratings including the company's Ba1 corporate family rating (CFR) and positive outlook are unchanged.

Assignments:

..Issuer: T-Mobile USA, Inc.

....Gtd Senior Secured Regular Bond/Debenture, Assigned Baa3 (LGD2)

RATINGS RATIONALE

T-Mobile's Ba1 CFR reflects the company's solid integration progress and accelerated achievement of operating cost synergies following its April 2020 merger with Sprint. The company's large and growing scale of operations, extensive asset base and solid industry market position as the second largest nationwide wireless operator on a wireless subscriber basis support continued subscriber growth, EBITDA margin expansion, steadily declining debt leverage (Moody's adjusted) and rising free cash flow over at least the next two years. T-Mobile's financial policy, which focuses on network infrastructure investments to support market share growth and incorporates a balanced and prudent approach to funding operating cash flow deficits, remains an important driver of the credit profile going forward. Moody's views network investments, including future spectrum investments, as supportive of the business profile. T-Mobile's debt-financed $10.5 billion all-in cost for 40 MHz of mid-band spectrum won in the FCC's recently completed C-band auction and potential additional spectrum investments are manageable under Moody's upgraded credit profile assessment. Although the amount the company invested in C-band spectrum trailed its nationwide wireless peers, T-Mobile will continue to operate with a significant capacity lead in the sub 6 GHz spectrum category for the next few years, and a smaller but still meaningful lead when Verizon Communications Inc. (Baa1 stable) is expected to receive the majority of its C-band licenses acquired in the auction at year-end 2023.

Achievement of synergies associated with the multi-year integration of the wireless network of Sprint Corporation (Sprint) into the legacy T-Mobile wireless network continues to progress both well ahead of schedule and Moody's initial expectations, and will now result in higher run rate cost efficiencies than estimated at the time of the company's merger with Sprint. The migration of most of Sprint's customers to T-Mobile's network is also tracking ahead of schedule and approximately 80% of Sprint customer traffic is now carried on the T-Mobile network. With over 14 months of solid network integration completed, any forward execution missteps would likely result in less severe service quality deterioration and associated customer churn fallout than at the beginning of this combination of the formerly third and fourth largest US nationwide wireless carriers. Since the merger, T-Mobile has continued to capture market share due to its focus on customer service, simple and innovative products, competitive price plans and enhancements to customer value.

Moody's expects that T-Mobile's debt leverage (Moody's adjusted) will fall to near or below 4.0x by year-end 2022 on a before merger related/Covid-19 costs basis, even after factoring in debt leverage impacts (Moody's adjusted) from potential tower lease extensions and reasonably sizable future debt-funded spectrum investments. Moody's further expects T-Mobile's organic growth and continued progress on cost synergies will enable it to generate positive free cash flow in the mid-single digits as a percentage of revenue by year-end 2022, with steady expansion higher thereafter. T-Mobile's growing free cash flow is expected to enable targeted share buybacks, which Moody's expects will be measured and constrained by Board-enforced and company-defined debt targets. Moody's believes that T-Mobile's steadily improving cost structure will enable the company to adequately invest in its network to remain competitive, including in future fiber and spectrum-based capacity enhancements as necessary to deliver evolving 5G technology applications while competing at discounted price points relative to its nationwide wireless peers. T-Mobile's increased operating scale enables the company to better pursue opportunities in under-indexed markets, including in more rural markets and in the enterprise end market. In addition, T-Mobile could benefit from its affiliation with its controlling shareholder DT, although Moody's does not impute any credit support to the rating from DT.

Moody's expects T-Mobile to maintain committed liquidity sufficient to address 12-18 months of total cash needs, including debt maturities. The company's ongoing and extensive refinancing actions post its merger with Sprint demonstrate solid access to multiple segments of the debt capital markets. Moody's believes T-Mobile's strategic business plan is adequately funded for aggregated costs to achieve remaining synergy targets and effect complete and full integration of networks and operations. T-Mobile's liquidity is very good as reflected in the SGL-1 speculative grade liquidity rating and is supported by a currently undrawn $5.5 billion revolving credit facility and about $7.8 billion of cash as of June 30, 2021.

The instrument ratings reflect the probability of default of T-Mobile, as reflected in the Ba1-PD probability of default rating, an average expected family recovery rate of 50% at default, and the loss given default (LGD) assessment of the debt instruments in the capital structure based on a priority of claims. The company's senior secured debt is rated Baa3 and has effective seniority provided by guarantees on a secured basis by all wholly-owned domestic restricted subsidiaries of T-Mobile and Sprint (subject to customary exceptions including for Sprint Spectrum special purpose vehicles), but the guarantees by Sprint, Sprint Communications, Inc. (SCI) and Sprint Capital Corporation (SCC) are unsecured due to secured debt restrictions in the Sprint senior note documents. The Baa3 senior secured rating reflects Moody's expectation that the mix of funded senior secured debt as a percentage of T-Mobile's total of funded senior secured debt plus funded senior unsecured debt will not exceed 80% for any extended period of time.

T-Mobile's senior unsecured debt issued by T-Mobile entities is rated Ba2, reflecting its junior position in the capital structure and the proportion of senior secured debt in the capital structure. Senior unsecured debt issued by Sprint entities is also rated Ba2. Senior unsecured debt issued by T-Mobile is guaranteed on an unsecured basis by all wholly-owned domestic restricted subsidiaries of T-Mobile and Sprint (subject to customary exceptions), but Sprint Spectrum special purpose vehicles (SPV) are designated as restricted non-guarantors. T-Mobile US, Inc. (T-Mobile US), parent of T-Mobile, T-Mobile and T-Mobile's wholly-owned domestic restricted subsidiaries (subject to customary exceptions) guarantee Sprint spectrum lease payments, out of which up to $3.5 billion is secured on a pari passu basis by the assets of the same entities whose assets are pledged to secure the senior secured debt held at T-Mobile. The senior unsecured notes at Sprint and Sprint's wholly-owned subsidiaries, SCI and SCC, receive downstream unsecured guarantees from T-Mobile US and T-Mobile. As Sprint is a subsidiary of T-Mobile, Moody's priority of claims waterfall ranks the senior unsecured notes issued by Sprint and its subsidiaries below in priority to the senior unsecured debt issued by T-Mobile entities, reflecting the fact that the senior unsecured notes issued by Sprint and its subsidiaries have guarantees from both T-Mobile US and T-Mobile but not from their operating subsidiaries. Although the T-Mobile and Sprint unsecured notes are rated at the same Ba2 rating, the LGD assessment on the Sprint notes is LGD6 compared to LGD4 on the T-Mobile notes reflecting the difference in ranking in Moody's priority of claims of waterfall.

Moody's includes the entire amount of spectrum-backed notes issued by SPV in a waterfall analysis and ranks the spectrum-backed notes at the same level as T-Mobile's senior secured debt. Though these spectrum-backed notes are bankruptcy remote from T-Mobile, this treatment accounts for the diminished asset pool available to the senior secured debt holders due to the prior claim on spectrum assets.

The positive outlook reflects T-Mobile's continued subscriber and service revenue growth, EBITDA margin expansion, steadily declining debt leverage (Moody's adjusted) and rising free cash flow.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

T-Mobile's ratings could be upgraded if debt/EBITDA (Moody's adjusted) declines towards 3.75x and free cash flow as a percentage of debt is in the mid-single digits, both on a sustained basis. Further, an upgrade would require the continuation of strong service revenue growth, sufficient network infrastructure investment to support competitive positioning and a publicly stated financial policy commitment to investment grade ratings.

Downward rating pressure could develop if T-Mobile's leverage is sustained near 4.5x, if free cash flow or liquidity deteriorates, if remaining merger integration progress materially falters or if shareholder buybacks become more aggressive and largely debt-funded. In addition, significant increases in the proportion of senior secured debt in the capital structure could pressure the senior secured rating downward.

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

With headquarters in Bellevue, Washington, T-Mobile USA, Inc. (T-Mobile) provides mobile communications services under the T-Mobile and Metro by T-Mobile brands in the US, Puerto Rico and the US Virgin Islands. Following the merger of its parent, T-Mobile US, Inc., with Sprint Corporation on April 1, 2020, T-Mobile now operates with 104.8 million subscribers as of June 30, 2021. DT owns an approximate 43.2% stake in T-Mobile's parent, T-Mobile US, Inc. (T-Mobile US), but consolidates the T-Mobile parent and subsidiaries by virtue of its voting control over approximately 52.1% of T-Mobile US.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Neil Mack, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 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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