Sprint Dept Analysis

[thermus]

Debt ratings agency, Standard & Poor's has lowered its corporate credit and senior unsecured ratings on Sprint Nextel to 'BB' from 'BBB-', or junk bond status. S&P also assigned a '3' recovery rating to Sprint Nextel's senior unsecured debt and US Unwired's second priority senior debt, which indicates expectations for meaningful (50% to 70%) recovery in the event of payment default. In addition, they withdrew Sprint Nextel's commercial paper rating.



Total debt outstanding as of Dec. 31, 2007 was about $22 billion.

"The downgrade is based on our assessment that Sprint Nextel's business risk profile is no longer supportive of an investment-grade rating given its deteriorating operating performance and lack of visibility in the wireless business, along with increased financial leverage due largely to declining EBITDA," said Standard & Poor's credit analyst Allyn Arden Wireless EBITDA fell 15% in 2007 while margins dropped to about 31% from 36.5% because of post-paid subscriber losses, declining ARPU, elevated churn, and increased customer care costs. Standard & Poor's expects that operating and financial results will remain under pressure over the next couple of years, as it will be difficult to reverse these trends given the ongoing operational challenges and expectations for increased competition.

As a result, credit protection measures are expected to weaken considerably. While S&P says that it does not anticipate that Sprint Nextel will violate covenants under the bank credit facility, which includes a 3.5x maximum debt to EBITDA covenant, the ratings agency remains concerned that the margin of covenant compliance will be somewhat thin in 2008.

The ratings on Sprint Nextel reflect declining revenue and margins due to the continued erosion of its subscriber base, lower ARPU, and high churn relative to its peers, as well as S&P's expectations for increased leverage over the next few years. Mitigating factors include Sprint Nextel's position as the third-largest wireless carrier in the U.S., a strong portfolio of spectrum licenses, and industry leading data penetration.

S&P said in its report that Sprint Nextel's weaker operating and financial performance is the result of several factors, most notably the erosion of the company's subscriber base on the legacy iDEN network. These customers represent about one-third of Sprint Nextel's total subscriber base. S&P believes the company will be challenged to stem the rate of subscriber losses until it is able to successfully migrate them to Q-Chat, a replacement for the iDEN push-to-talk service, which is expected to be in 20 markets by the end of the second quarter of 2008. However, growth prospects for Q-Chat and its viability as a good substitute for push-to-talk remains uncertain.

The company's WiMax deployment is not currently a material ratings factor, given the uncertainties regarding its strategy.

Posted to the site on 2nd May 2008