Fitch: Announcements Raise Concerns Regarding Credit, Longer-Term Operating Trends for Sprint Nextel
October 09, 2007 at 16:08 PM EDT
Sprint Nextel's (Issuer Default Rating [IDR] 'BBB'; Outlook Negative) (NYSE:S) recent announcement regarding the resignation of its CEO and the reduced expectations for operating guidance in 2007 have increased concerns on the longer-term operating trends in Sprint's core operations, according to Fitch Ratings. These announcements highlight the challenges, uncertainties and execution risks associated with Sprint Nextel improving its core operations, including its competitive position in a challenging environment with slowing growth of postpaid additions. Absent any further indications of weakened financial or operating performance, Fitch will focus a review of Sprint's ratings in the following areas:
--Given the seasonality and integration/transitional effects on third quarter results, material improvement in fourth quarter results with a focus on several operating metrics including postpaid gross additions, postpaid net additions, churn and ARPU.
--The likelihood that Sprint Nextel can demonstrate longer-term sustainable momentum to improve its competitive position and the stability of cash flows in its core operations. Consideration will also be given to the susceptibility of Sprint Nextel's subscriber base, particularly the subprime segment, to broader economic challenges in the current environment.
--The aggregate spending and management focus on other strategic initiatives including share repurchases, WiMAX and spectrum rebanding.
One of the major challenges Sprint Nextel must address is elevated postpaid churn levels, which was materially higher in the second quarter 2007 than AT&T Wireless and Verizon Wireless. This challenge is exacerbated by the billing platform changes and the numerous initiatives that require management's attention.
Fitch also believes the company faces significant technology and execution risk surrounding the migration of its iDEN subscriber base to CDMA and the implementation of its WiMAX strategy. The WiMAX deployment will require several billion dollars of investment as well as the incurrence of significant start-up operating losses, which could become a material drain on the company's financial resources particularly if the company further underperforms expectations. Offsetting these concerns to some extent, Fitch does acknowledge that Sprint Nextel has considerable scale and generates significant cash flow from its operations with leverage of approximately 2.1 times at the end of the second quarter. Sprint Nextel's liquidity position is sufficient given its cash position, free cash flow and available draw under its credit facility. Cash at the end of the second quarter of 2007, pro forma for the planned affiliate debt redemptions, was $1.7 billion.