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Rating Action:

Moody's downgrades Sprint Nextel to Ba3 with negative outlook

Global Credit Research - 21 Apr 2011

Approximately $20 billion in debt affected

New York, April 21, 2011 -- Moody's Investors service has downgraded the corporate family rating (CFR) for Sprint Nextel Corp. ("Sprint") to Ba3 from Ba2 prior, concluding Moody's review of Sprint's ratings which was initiated in November of 2010. The downgrade reflects Moody's view that Sprint's credit profile, despite recent operational improvements, is likely to deteriorate as the company spends heavily to modernize its networks while attempting to formulate its long-run 4G strategy. Moody's believes that the ongoing dispute between Sprint and Clearwire has eroded the competitive advantage of both companies, while industry peers speed ahead.

Moody's ratings outlook for Sprint is negative.

RATINGS RATIONALE

"The sacrifices required to turn around the company following the Nextel acquisition and the disastrous structure of the Clearwire partnership have led to Sprint's current predicament" noted Moody's Senior Vice President Dennis Saputo. Moody's believes that the consummation of a wholesale pricing agreement with Clearwire is positive. However, the struggle to execute this basic agreement given Sprint's majority ownership and status as Clearwire's largest customer demonstrates the lack of agility within the partnership. "Sprint and Clearwire are bound in a symbiotic relationship whereby each will be made weaker without the cooperation of the other," Saputo said.

Moody's believes that Sprint's plan to address the deficiencies in its dual networks will eventually achieve meaningful cost savings given the leap forward possible with currently available technology. However, we remain unconvinced that Clearwire will be able to bridge the gap and allow Sprint to continue offering a competitive 4G service until 2013 when Sprint's upgrade nears completion. This skepticism is based on our views of Clearwire's financial, technical and operational limitations, the relationship between the two companies and Sprint's spectrum position excluding Clearwire. "Sprint is left in a weak competitive position without the network assets or deep spectrum holdings to compete over the long-term for broadband wireless customers, and time is not on their side," commented Saputo.

Moody's feels that Sprint's nascent recovery could stall as competitors roll out robust, nationwide 4G offers. A loss of sales momentum, combined with a sharp increase in network investment, would dampen Sprint's ability to generate free cash flow. Our negative outlook is based on the significant execution risk related to the network upgrade and Sprint's tenuous relationship with Clearwire. We see little opportunity for a third party to offer spectrum assets to Sprint, through sale or lease, which would allow Sprint to retain the lead in 4G offerings.

Starting in 2012, Sprint will increase capital investment by $1-2 billion per year, resulting in negative free cash flow. Moody's anticipates that Sprint's leverage will remain above 4x (Moody's adjusted) through 2013 and free cash flow will fall sharply, turning negative in 2012. Applying proportionate consolidation of Clearwire, which is Moody's current analytical framework for Sprint, Moody's projects Sprint's leverage will approach 5x and free cash flow will remain negative through 2013. Should Sprint part with Clearwire, Moody's would not apply proportionate consolidation of Clearwire to Sprint's credit metrics. However, based on our view of the higher investment required for Sprint to proceed alone, Moody's estimates Sprint's credit metrics would be weaker than our proportional view of a working partnership.

Moody's views Sprint's current liquidity profile as good. We estimate Sprint will exit 2011 with over $4 billion in cash. The company has a $2.1 billion revolver that has $700 million remaining undrawn ($1.4 billion is committed to letters of credit). Sprint has $2.25b in debt maturing in March of 2012. However, Sprint faces material annual debt maturities, increased capex and possible investment in either Clearwire or additional spectrum going forward. Moody's believes that Sprint's liquidity, which is currently very strong, may weaken beyond 2012, a factor considered in our negative outlook.

Moody's could stabilize the outlook if the company were to reach a definitive agreement with Clearwire that would result in a coordinated, nationwide 4G network plan and marketing strategy and if Sprint's leverage (on a proportionate consolidated basis with Clearwire and incorporating Moody's standard adjustments) were to remain below 4.5x on a sustained basis.

Sprint's ratings could be lowered further if the company's network upgrade were to fail to proceed on schedule or yield the benefits promised or if the company's competitive position deteriorated as evidenced by postpaid churn rising above 2.0%. Specifically, if leverage was likely to exceed 5x on a sustained basis, which we believe would be the case if the company were to abandon its partnership with Clearwire, the ratings could be downgraded.

Moody's has taken the following rating actions:

.Issuer: Sprint Nextel Corp.

..Corporate Family Rating -- Downgraded Ba3 from Ba2 prior

..Probability of Default Rating -- Downgraded Ba3 from Ba2 prior

..Speculative Grade Liquidity Rating -- SGL-1 unchanged

..Outlook -- Negative from Under Review possible downgrade

..Senior Unsecured Notes -- Downgraded B1, LGD5 (77%) from Ba3, LGD5 (74%)

..Senior Unsecured Gtd. Bank Credit Facility -- Downgraded Baa3, LGD2 (10%) from Baa2, LGD2 (12%)

.Issuer: Sprint Capital Corp.

..Senior Unsecured Notes -- Downgraded B1, LGD5 (77%) from Ba3, LGD5 (74%)

.Issuer: Nextel Communications Inc.

..Senior Unsecured Notes -- Downgraded Ba3, LGD3 (42%) from Ba2, LGD3 (39%)

.Issuer: iPCS Inc.

..Senior Secured 1st Priority Notes -- Downgraded Ba3, LGD3 (48%) from Ba2, LGD3 (42%)

..Senior Secured 2nd Priority Notes -- Downgraded B1, LGD5 (77%) from Ba3, LGD5 (74%)

The principal methodology used in rating Sprint Nextel Corporation was the Global Telecommunications Industry Industry Methodology, published December 2010. Other methodologies used include Loss Given Default for Speculative Grade Issuers in the US, Canada, and EMEA, published June 2009 (and/or the Government-Related Issuers methodology,published July 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Dennis Saputo
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
John Diaz
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Sprint Nextel to Ba3 with negative outlook
No Related Data.

 

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