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Rating Action:

Moody's assigns Baa3 to T-Mobile's senior secured credit facilities, downgrades unsecured to Ba3

01 Apr 2020

New York, April 01, 2020 -- Moody's Investors Service (Moody's) has assigned Baa3 ratings to T-Mobile USA, Inc.'s (T-Mobile) new senior secured credit facilities (Secured Credit Facilities), comprised of a $4 billion five-year senior secured revolving credit facility (undrawn) and $4 billion seven-year senior secured term loan, and proposed senior secured notes (Secured Notes) of various maturities in USD and/or Eurodollar denominations. Moody's has affirmed T-Mobile's Ba2 corporate family rating (CFR) and Ba2-PD probability of default rating (PDR) and downgraded its senior unsecured rating to Ba3 from Ba2, concluding a review for downgrade on these notes that was initiated on April 29, 2018. A $19 billion 364-day secured bridge loan facility (Secured Bridge Facility), drawn in full today and equal in priority ranking with the Secured Credit Facilities and Secured Notes, is unrated and is expected to be partially repaid with proceeds from the proposed new Secured Notes. Proceeds from the Secured Credit Facilities and Secured Bridge Facility refinanced portions of the balance sheets of Sprint Corporation (Sprint) and T-Mobile with today's completion of the business combination (the Merger) of T-Mobile US, Inc. (T-Mobile US), parent of T-Mobile, and Sprint. The downgrade of T-Mobile's unsecured debt reflects the significant increase in the proportion of secured debt in the pro forma capital structure of the combined company. T-Mobile's SGL-1 speculative grade liquidity rating is unchanged. The outlook remains stable.

The Secured Credit Facilities and Secured Bridge Facility was primarily used to repay T-Mobile's existing term loan and revolving credit facilities held by Deutsche Telekom AG (DT, Baa1 negative), a portion of unsecured notes held by DT, existing term loan and revolving credit facilities and accounts receivable facilities held at Sprint's wholly-owned subsidiary Sprint Communications, Inc. (SCI), Sprint's guaranteed unsecured notes due 2028, and for transaction fees and expenses.

As part of this action, Moody's has upgraded the senior unsecured notes of Sprint itself and SCI to B1 from B3, and the unsecured notes of Sprint Capital Corporation (SCC) to B1 from B3 reflecting the guarantees from Sprint itself and SCI on a senior unsecured basis. This rating action concludes a review for upgrade on these notes that was initiated on April 29, 2018. The ratings on all of the unsecured notes of Sprint, SCI and SCC also reflect their junior-most position in the pro forma capital structure of the combined company and downstream unsecured guarantees from T-Mobile US and T-Mobile.

With the Merger's close, T-Mobile remains a wholly-owned subsidiary of T-Mobile US and Sprint becomes a wholly-owned subsidiary of T-Mobile US. DT and SoftBank Group Corp. (SoftBank, Ba3 RUR downgrade), as well as public shareholders of T-Mobile US and Sprint, now own the equity of the combined company, with T-Mobile as the successor company operating under the T-Mobile brand. SoftBank has granted a proxy to vote its T-Mobile shares to DT subject to certain exceptions.

Moody's also withdrew the following ratings: Sprint's B2 CFR, B2-PD PDR, B1 rating on Sprint's guaranteed unsecured notes due 2028, and SCI's Ba2 senior secured rating. With the Merger's close, Sprint's guaranteed unsecured notes due 2028 and SCI's senior secured debt were repaid.

Upgrades:

..Issuer: Sprint Capital Corporation

....Senior Unsecured Regular Bond/Debenture, Upgraded to B1 (LGD5) from B3 (LGD5)

..Issuer: Sprint Communications, Inc.

....Senior Unsecured Regular Bond/Debenture, Upgraded to B1 (LGD5) from B3 (LGD5)

..Issuer: Sprint Corporation

....Senior Unsecured Regular Bond/Debenture, Upgraded to B1 (LGD5) from B3 (LGD5)

Downgrades:

..Issuer: T-Mobile USA, Inc.

....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba3 (LGD4) from Ba2 (LGD4)

Assignments:

..Issuer: T-Mobile USA, Inc.

....Senior Secured Bank Credit Facility, Assigned Baa3 (LGD2)

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

Outlook Actions:

..Issuer: T-Mobile USA, Inc.

....Outlook, Remains Stable

..Issuer: Sprint Capital Corporation

....Outlook, Changed To No Outlook From Rating Under Review

..Issuer: Sprint Communications, Inc.

....Outlook, Changed To No Outlook From Rating Under Review

..Issuer: Sprint Corporation

....Outlook, Changed To No Outlook From Rating Under Review

Affirmations:

..Issuer: T-Mobile USA, Inc.

.... Corporate Family Rating, Affirmed Ba2

.... Probability of Default Rating, Affirmed Ba2-PD

Withdrawals:

..Issuer: Sprint Communications, Inc.

....Senior Secured Bank Credit Facility, Withdrawn , previously rated Ba2 (LGD2)

....Senior Secured Regular Bond/Debenture, Withdrawn , previously rated Ba2 (LGD2)

..Issuer: Sprint Corporation

.... Probability of Default Rating, Withdrawn , previously rated B2-PD

.... Speculative Grade Liquidity Rating, Withdrawn , previously rated SGL-3

.... Corporate Family Rating, Withdrawn , previously rated B2

....Senior Unsecured Regular Bond/Debenture, Withdrawn , previously rated B1 (LGD3)

RATINGS RATIONALE

T-Mobile's post-Merger credit profile reflects governance considerations, specifically our expectation that the company's financial policy will focus on improving leverage to under 4x, the company's large scale of operations, extensive asset base and enhanced industry market position which Moody's believes will align the company on a post-merger subscriber basis to very near AT&T Inc. (AT&T, Baa2 stable). We expect T-Mobile to continue to capture market share following the transaction due to its focus on customer service, simple products, competitive price plans and enhancements to customer value.

Moody's projects that the transaction will result in the combined company's leverage peaking near 4.5x (Moody's adjusted) one year after the Merger's close, and falling towards 4x two years after and below 4x thereafter. Moody's estimates free cash flow will be approximately breakeven in the first year based on revised integration benefits compared with our initial expectations. Moody's expects free cash flow will steadily ramp thereafter, with meaningful growth potential in the third year and beyond.

Moody's believes that the combination of T-Mobile US and Sprint will substantially improve the combined company's cost structure enabling it to invest in its network as the company prepares to further develop capacity for 5G technology applications. 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. It will need to maintain access to multiple segments of the debt capital markets to allow it to comfortably address upcoming maturities. Moody's believes T-Mobile's business plan at the Merger's close is adequately funded for aggregated costs to achieve synergies and effect full integration of networks and operations. The company's 364-day Secured Bridge Facility can be extended for an additional year under two 6-month extensions so long as no payment or bankruptcy event of default has occurred. We expect T-Mobile will fully refinance any remaining outstandings under its Secured Bridge Facility as soon as practicable. Moody's expects T-Mobile would have very good liquidity supported by an undrawn $4 billion revolving credit facility and approximately $7.4 billion of cash.

These strengths could be offset by a meaningful increase in business risk and a near term deterioration in operating free cash flow as the costs to achieve synergies are incurred well ahead of the benefits. Moody's believes that the process of integrating the two networks is the primary risk factor that could negate the potential benefits of the business combination. If the integration work results in a deterioration in service quality as T-Mobile migrates Sprint customers to the T-Mobile network, churn would increase and T-Mobile would suffer damage to its newly defined brand and reputation operating as a combined company. The combined effects of increased churn and lower share of gross adds could pressure T-Mobile's revenue and cash flow. If sustained, a negative subscriber trajectory would undermine the confidence of investors and present liquidity difficulties for the combined company, especially as it addresses debt maturities in later years.

The US wireless industry is expected to be more resilient than many sectors as the spread of the coronavirus outbreak widens and the global economic outlook deteriorates. Moody's does not anticipate reduced wireless demand initially as a result of a weakening US economy. While telecom networks might become stressed from rising teleworking activity, Moody's notes that T-Mobile has deployed additional 600 MHz spectrum made available to it from several companies, including DISH Network Corporation (Dish, Ba3 rating under review for downgrade), that have allowed the company to remove smartphone data caps for all customers through mid-May initially. If economic conditions remain weak for an extended period of time T-Mobile could see lower or negative net subscriber additions growth due to its retail store closings, with some positive offset from digital sales and marketing efforts. Customer churn associated with missed service and device payments could ramp over time if any economic downturn is prolonged. Disruptions in supply chains could also impact device and network equipment sourcing, but this would not likely appear as a negative development until the second half of 2020. Moody's believes T-Mobile is more resilient to these unprecedented operating conditions and shifts in market sentiment that curtail credit availability than lower-rated issuers and more vulnerable industry sectors. Moody's will take rating actions as warranted to reflect the breadth and severity of the shock as it unfolds and potentially impacts T-Mobile's credit quality.

Post-Merger, secured debt held at T-Mobile is guaranteed 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, SCI and SCC are unsecured due to secured debt restrictions in the Sprint senior note documents. The Baa3 secured rating reflects Moody's expectation that funded secured debt will represent no greater than 50% of the total of funded secured debt plus unsecured debt of the combined company at the Merger's close or thereafter.

Post-Merger, unsecured debt held at 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 are designated as restricted non-guarantors. T-Mobile US, T-Mobile and T-Mobile's and Sprint'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 secured debt held at T-Mobile. Sprint, SCI and SCC senior unsecured notes receive downstream unsecured guarantees from T-Mobile US and T-Mobile.

The stable outlook reflects T-Mobile's market share gains and meaningful margin expansion, which will continue to benefit cash flow. The stable outlook also reflects Moody's expectations that T-Mobile will refinance all of its 364-day secured bridge loan facility as soon as practicable over the next 2-3 quarters.

Factors that would lead to an upgrade or downgrade of the ratings:

T-Mobile's rating could be upgraded if leverage is on track to fall below 4.0x and free cash flow were to improve to the high single digits percentage of total debt (all on a Moody's adjusted basis).

Downward rating pressure could develop if T-Mobile's leverage is sustained above 4.5x and free cash flow deteriorates. This could occur if EBITDA margins come under sustained pressure or if future debt-funded spectrum purchases significantly exceed our expectations. In addition, a deterioration in liquidity such that the company was unable to fully address 12-18 months of total cash needs, including debt maturities, would pressure the rating downward.

The revolving credit facility is subject to a maximum first lien secured net leverage ratio of 3.30x, tested quarterly. The first lien credit facility is expected to contain covenant flexibility for transactions that could adversely affect creditors, including incremental facility capacity up to the greater of $11 billion and 0.5x consolidated cash flow (to be determined definition), plus an unlimited amount subject to pro forma (x) first lien net leverage ratio = 2.0x, if pari passu secured, (y) secured net leverage ratio = 2.5x, if junior secured, or (z) total net leverage ratio = 6.0x, if unsecured (ratios limited to indebtedness for borrowed money, including indebtedness of any Spectrum special purpose vehicle, but excluding indebtedness in respect of tower securitizations, capital leases, purchase money debt, and other exceptions (to be determined definition). In addition, borrower may incur incremental debt to finance a permitted acquisition or investment so long as the leverage ratios do not increase. Up to the greater of $5 billion and 22.5% of consolidated cash flow of incremental or incremental equivalent debt may be incurred with an earlier maturity date than the term loan maturity date.

Other flexible covenant provisions include: (a) the risk that guarantees may be released when a subsidiary ceases to be wholly owned, (b) collateral leakage is permitted through the transfer of assets to unrestricted subsidiaries; there are no additional "blocker" protections, and (c) step downs in the asset sale prepayment requirement to 75%, then 50% of net proceeds subject to achieving certain first lien net leverage ratios.

The above are proposed terms and the final terms of the credit agreement can be materially different.

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.

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating outcome announced and described above.

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.

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.
© 2020 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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