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Rating Action:

Moody's upgrades T-Mobile to Baa3; outlook stable

20 Jul 2022

New York, July 20, 2022 -- Moody's Investors Service (Moody's) upgraded T-Mobile USA, Inc.'s (T-Mobile) senior unsecured debt rating to Baa3 from Ba2 and affirmed the Baa3 rating on the company's existing senior secured notes and senior secured revolving credit facility. As a consequence of this rating action, Moody's fully expects T-Mobile will release all of the collateral underlying its existing senior secured notes through an Investment Grade Event Election option available to it under its secured bond indenture. This option will be able to be exercised once the company refinances its existing senior secured revolving credit facility with a replacement unsecured revolving credit facility or amends the existing facility's collateral terms. Upon the effective exercise of the option and the resulting release of all underlying collateral, T-Mobile's existing senior secured debt obligations will become unsecured obligations and will then rank equal in priority with the company's Baa3-rated senior unsecured debt at both T-Mobile and its wholly-owned subsidiary Sprint LLC (Sprint). Moody's has also withdrawn T-Mobile's Ba1 corporate family rating, Ba1-PD probability of default rating and SGL-1 speculative grade liquidity rating. With this rating action, Moody's changed T-Mobile's ratings outlook to stable from positive.

Upgrades:

..Issuer: T-Mobile USA, Inc.

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa3 from Ba2 (LGD4)

..Issuer: Sprint Capital Corporation

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa3 from Ba2 (LGD6)

..Issuer: Sprint Communications LLC

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa3 from Ba2 (LGD6)

..Issuer: Sprint LLC

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa3 from Ba2 (LGD6)

Affirmations:

..Issuer: T-Mobile USA, Inc.

....Senior Secured Bank Credit Facility, Affirmed Baa3

....Senior Secured Regular Bond/Debenture, Affirmed Baa3

Withdrawals:

..Issuer: T-Mobile USA, Inc.

.... Corporate Family Rating, Withdrawn , previously rated Ba1

.... Probability of Default Rating, Withdrawn , previously rated Ba1-PD

.... Speculative Grade Liquidity Rating, Withdrawn , previously rated SGL-1

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 Senior Secured Bank Credit Facility, Withdrawn, Previously rated (LGD2)

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 Senior Secured Regular Bond/Debenture, Withdrawn, Previously rated (LGD2)

Outlook Actions:

..Issuer: Sprint Capital Corporation

....Outlook, Changed To Stable From No Outlook

..Issuer: Sprint Communications LLC

....Outlook, Changed To Stable From No Outlook

..Issuer: Sprint LLC

....Outlook, Changed To Stable From No Outlook

..Issuer: T-Mobile USA, Inc.

....Outlook, Changed To Stable From Positive

RATINGS RATIONALE

The ratings upgrade reflects T-Mobile's accelerated achievement of higher than expected operating cost synergies following its April 2020 merger with Sprint, significant and nearly complete network and operations integration and high visibility into the company's steady path towards sustained debt leverage (Moody's adjusted) below 3.75x. T-Mobile's sizable operating scale, high speed 5G coverage footprint, substantial upside growth potential in historically under-indexed rural and enterprise end market segments, solid incremental revenue growth adjacencies in fixed wireless access, extensive asset base and solid industry market position support continued subscriber growth, EBITDA margin expansion and ramping free cash flow over the next 12-18 months. The company's financial policy, which prudently focuses on network infrastructure investments to support market share growth, remains an important driver of the credit profile going forward. Moody's views network investments, including spectrum investments, as supportive of the business profile.

T-Mobile is on track to realize around $5.3 billion of merger synergies by year-end 2022, and expects to achieve $7.5 billion of synergies by year-end 2024. The multi-year integration of the wireless network of Sprint into the legacy T-Mobile network has progressed far ahead of the target objectives set at the merger date in 2020. Synergies will exceed Moody's early expectations by over 25%, delivering high run rate cost efficiencies that will further bolster ramping free cash flow. Moody's expects the company will rapidly upgrade or decommission all legacy Sprint network tower sites by year-end 2022, with a meaningful pick-up in this activity beginning in the second half of 2022. The effort to migrate as many legacy Sprint customers as possible to T-Mobile's network, which includes guiding customers to optimal service and payment plan choices, will also accelerate in 2H 2022 from the around 40% of Sprint accounts which have migrated to date. Predominantly all of legacy Sprint customer traffic is now carried on the T-Mobile network. With over two years of solid network and operations integration completed, Moody's views the potential for execution missteps which could result in service quality deterioration and associated customer churn fallout as a low, remote and quickly abating risk. Since the merger, T-Mobile has continued to capture share in a saturated market due to its relentless focus on customer service, simple and innovative product offerings, competitive price plans and continual enhancements to its customer value proposition.

Moody's expects that T-Mobile's debt leverage (Moody's adjusted) will fall to near 3.7x 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 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 ramping expansion thereafter. While T-Mobile's growing free cash flow can enable targeted share buybacks, Moody's expects such shareholder friendly actions will be prudent, measured and ultimately constrained by Board-enforced and company-defined debt targets. Moody's believes that T-Mobile's steadily improving cost structure will enable it to adequately invest in its network to remain competitive, including in future spectrum-based capacity enhancements and potential fiber investments if 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 now enables it to better pursue opportunities in several under-indexed markets, including in more rural and enterprise end markets. In addition, T-Mobile could benefit from its affiliation with its controlling shareholder Deutsche Telekom AG (DT, Baa1 stable), although Moody's does not impute any credit support to the rating from DT.

Moody's expects that T-Mobile will maintain good liquidity over the next 12-18 months to address total cash needs including remaining debt maturities in 2022 and 2023. At March 31, 2022 T-Mobile had $3.2 billion of cash on hand and full availability under its $5.5 billion revolver. Moody's believes T-Mobile's remaining business and integration plan is adequately funded for aggregated costs to achieve synergies and effect full and final integration of networks and operations. For 2022, we expect the company to generate free cash flow (Moody's adjusted) of around $5.3 billion. Moody's free cash flow calculation is before spectrum investments, which we treat as a cash outflow within other investing activities on an industry basis and which can place some strain on overall liquidity when spectrum becomes broadly available in the industry. In 2023 we expect free cash flow to continue to ramp as the company realizes further merger synergies.

T-Mobile also uses accounts receivable securitizations to manage the working capital swings associated with device financing plans. The company has a $950 million accounts receivable securitization facility and a $1.3 billion equipment installment plan. These facilities amortize over a short time frame and are a source of revolving credit. Moody's expects the company to extend and likely increase the size of these facilities as necessary, but if unsuccessful this could be a call on cash of up to around $2 billion.

The company's commitments under its revolver maturing on April 1, 2025 include a first lien net leverage financial maintenance covenant of 3.3x, which the company was in compliance with as of March 31, 2022.

Upon the release of all collateral underlying T-Mobile existing senior secured notes under the Investment Grade Event Election option, concurrent with the release of all collateral underlying T-Mobile's existing senior secured revolving credit facility, all formerly senior secured debt, with the exception of debt issued at Sprint Spectrum special purpose vehicles (SPVs), will become senior unsecured.

For so long as the outstanding principal amount of the senior unsecured notes issued by T-Mobile in 2017 and 2018 exceeds $2.0 billion, (1) senior unsecured debt issued by T-Mobile (including any notes initially issued as senior secured notes) will continue to be guaranteed on a senior unsecured basis by T-Mobile US, Inc. (T-Mobile US), parent of T-Mobile, and all wholly-owned domestic restricted subsidiaries of T-Mobile, including the entities acquired in the 2020 Sprint merger transaction (but SPVs will continue to be designated as restricted non-guarantors, and (2) T-Mobile US, T-Mobile and T-Mobile's wholly-owned domestic restricted subsidiaries (subject to customary exceptions) will also continue to guarantee Sprint spectrum lease payments on a senior unsecured basis. At such time as $2.0 billion or less of the senior unsecured notes issued by T-Mobile in 2017 and 2018 remain outstanding (and concurrent with the release of all subsidiary guarantees underlying T-Mobile's revolving credit facility), (1) all subsidiary guarantees of T-Mobile's senior unsecured debt may be released at T-Mobile's election, other than subsidiary guarantees of the senior unsecured notes issued by T-Mobile in 2017 and 2018, and (2) certain subsidiaries of Sprint Communications LLC (SC) will remain guarantors of the Sprint spectrum lease payments unless SC satisfies certain ratings and asset coverage conditions.

At all times, the senior unsecured notes issued by Sprint and Sprint's wholly-owned subsidiaries, SC and Sprint Capital Corporation (SCC), will continue to receive downstream senior unsecured guarantees from T-Mobile US and T-Mobile. Further, (1) the senior unsecured notes issued by Sprint will continue to be guaranteed by SC, (2) the senior unsecured notes issued by SC will continue to be guaranteed by Sprint and (3) the senior unsecured notes issued by SCC will continue to be guaranteed by both Sprint and SC.

The stable outlook reflects Moody's expectation for T-Mobile's continued subscriber and service revenue growth, EBITDA margin expansion, debt leverage (Moody's adjusted) declining steadily towards and sustained around 3.75x 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 below 3.5x and free cash flow as a percentage of debt rises to the high-single digits, both on a sustained basis.

The ratings could be downgraded if T-Mobile's debt/EBITDA (Moody's adjusted) was expected to be sustained above 4x, including as a result of additional debt-funded investments, or if free cash flow was to turn negative for an extended period of time.

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 on April 1, 2020, T-Mobile now operates with 109.5 million subscribers as of March 31, 2022. Deutsche Telekom AG owns an approximate 48.3% 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 51.8% of T-Mobile US.

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017 and available at https://ratings.moodys.com/api/rmc-documents/48906. Alternatively, please see the Rating Methodologies page on https://ratings.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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) 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 https://ratings.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 https://ratings.moodys.com

Please see https://ratings.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 issuer/deal page on https://ratings.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.
© 2022 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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