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Rating Action:

Moody's downgrades Sprint's CFR to B3; outlook remains negative

15 Sep 2015

NOTE: On September 17, 2015, the press release was corrected as follows: In the first sentence of the first paragraph of the Ratings Rationale section, the reference to the Corporate Family Rating was corrected to B3. Revised release follows.

New York, September 15, 2015 -- Moody's Investors Service ("Moody's") downgraded several ratings of Sprint Corporation ("Sprint" or "the company"), including the company's Corporate Family Rating ("CFR") to B3 from B1, the company's Probability of Default Rating ("PDR") to B3-PD from B1-PD and Sprint's senior unsecured rating to Caa1 from B2. Moody's also lowered Sprint's Speculative Grade Liquidity ("SGL") Rating to SGL-4 from SGL-3. Today's rating action reflects Moody's view that the numerous operational and network initiatives, management changes, and funding plans recently announced by Sprint and its parent company and majority shareholder, SoftBank Group Corp. ("SoftBank"), will be insufficient to stabilize Sprint's operations in the next few years. The brutal competition now playing out in the US wireless industry will pressure the financial performance of even the strongest operators. Consequently, we expect Sprint's cash consumption to remain high, liquidity to remain weak and leverage to increase. Finally, we remain concerned about the ability of Sprint to refinance its large upcoming debt maturities absent a much stronger commitment from SoftBank to the long-term strategic importance of Sprint in SoftBank's overall plans. The outlook remains negative.

Moody's believes that despite some recent improvement in operating metrics (i.e. reduced churn, decrease in postpaid handset losses) the capital markets will be disinclined to provide funding to Sprint without enhanced collateral in light of its ongoing very large cash needs. We believe that Sprint (and Softbank) recognize this fact. To address this problem, Sprint, in conjunction with Softbank, have announced plans to establish two leasing companies in order to limit the need for any new debt or equity capital or to sell spectrum "in the foreseeable future". These new leasing companies will be set up to finance customer device leases and network equipment for its network densification program. While details haven't been finalized, the credit impact could be positive for Sprint since liquidity is a key weakness for the company as it invests in a turnaround. However, if the entity does not represent a permanent partner for Sprint, one which can endure all phases of the business or credit cycle, then the financial obligation of the leasing company would likely be added back to Sprint's adjusted credit metrics and further reflected in its long-term ratings.

Sprint's debt maturities ramp up significantly starting in December 2016 when $2.0 billion of senior notes mature. Annual debt maturities over the following five years average about $2.5 billion per year.

In addition, a major spectrum auction of low-band spectrum is expected to occur in 2016. In the past, Sprint has expressed an interest in this type of spectrum in order to complement its holdings of mid-band and high-band spectrum. Recently, it has been less clear on whether it would seek to augment its relatively shallow low-band holdings. We believe that a balanced mix of spectrum is critical for operators to compete effectively and profitably in the US over the long-term. Consequently, we believe Sprint may need to reconsider its reluctance to sell some of its very deep holdings of 2.5GHz spectrum.

Moody's has taken the following rating actions:

.Issuer: Sprint Corporation

..Corporate Family Rating -- B3, from B1

..Probability of Default Rating -- B3-PD, from B1-PD

..Speculative Grade Liquidity Rating -- SGL-4, from SGL-3

..Outlook -- remains Negative

..Senior Unsecured Notes -- Caa1, LGD5 from B2, LGD5

..Senior Unsecured Shelf -- (P)Caa1 from (P)B2

.Issuer: Sprint Communications, Inc.

..Outlook -- remains Negative

..Senior Unsecured Notes -- Caa1, LGD5 from B2, LGD5

..Junior Guaranteed Unsecured Notes -- B1, LGD2, from Ba2, LGD2

..Senior Unsecured Gtd. Bank Credit Facility -- Ba3, LGD2, from Ba1, LGD2

.Issuer: Sprint Capital Corporation

..Outlook -- remains Negative

..Senior Unsecured Notes -- Caa1, LGD5 from B2, LGD5

..Senior Unsecured MTN Program -- (P)Caa1 from (P)B2

.Issuer: Clearwire Communications LLC

..Outlook -- remains Negative

..Senior Secured 1st Lien Notes -- Ba3, LGD1 from Ba1, LGD1

..Exchangeable Notes due 2040 -- B1, LGD3 from Ba2, LGD2

RATINGS RATIONALE

Sprint's B3 CFR reflects the company's highly leveraged capital structure, intense competitive challenges, a deteriorating liquidity position, our projection for substantial negative free cash flow through at least 2017 and Sprint's need for significant additional capital to fund its network buildout and to refinance upcoming sizable maturities. The rating currently incorporates a one notch lift due to our expectation that Sprint's parent company and majority shareholder, SoftBank Group Corp. (Ba1 CFR, stable outlook) will seek to retain the viability of Sprint as a going concern. The rating also recognizes its valuable spectrum assets.

The lowering of Sprint's SGL rating to SGL-4 indicates our expectation that the company will sustain a weak liquidity profile through the next 12 to 18 months. We believe that additional liquidity will be required because of Sprint's aggressive pricing plans and the negative cash flow impact from installment billing plans. We expect Sprint to remain cash flow negative for CYE2015 and CYE2016, at least. As of June 30, 2015, Sprint had $2.3 billion in cash and short-term investments and $2.9 billion borrowing capacity on its $3.3 billion revolving credit facility and about $1.4 billion borrowing capacity under its $3.3 billion service receivables financing agreement. In addition, Sprint also has $1.3 billion of undrawn availability under its network vendor financing which is utilized towards the purchase of 2.5 GHz equipment. We anticipate Sprint utilizing its service receivables facility, network vendor financing and possibly its revolver to support its liquidity position. As of June 30, 2015, Sprint has $1.2 billion (including $444 million of the Clearwire Exchangeable Notes that becomes callable) and $3.6 billion of debt maturing for FYE2015 and FYE2016 respectively.

The negative outlook reflects our belief that Sprint is going to need significant additional funding going forward. It remains uncertain whether or not the capital markets will be receptive to additional funding in light of Sprint's weak performance. Also, if T-Mobile US and Dish were to agree to a merger, capital market access for Sprint would be further marginalized..

The outlook could be stabilized if Sprint received significant additional equity funding to ensure the company has a fully funded business plan. Also, a stronger commitment from SoftBank (i.e. debt guarantee) regarding the financial and strategic importance of Sprint to SoftBank's global strategy could stabilize the outlook. Finally, the establishment of a leasing program(s) that improves Sprint's liquidity and leverage profiles would also help stabilize the outlook.

Given the negative outlook, a ratings upgrade for Sprint is very unlikely. However, if leverage were to drop and remain below 5.5x, and free cash flow were to turn positive, upward rating pressure could ensue (note that all cited financial metrics are referenced on a Moody's adjusted basis). In addition, significant financial support from Softbank in the form of a debt guarantee or material equity capital infusion could also support Sprint's ratings.

Sprint's ratings would be lowered if leverage were likely to be sustained above 6.5x (Moody's adjusted) or if the company's liquidity profile does not improve soon.

The principal methodology used in these ratings was Global Telecommunications Industry published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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

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.

Dennis Saputo
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's downgrades Sprint's CFR to B3; outlook remains negative
No Related Data.
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