Sprint Nextel's Bleak Outlook

Sprint Nextel (S Quote) was dealt a blow after a Standard & Poor's analyst said the wireless carrier's credit measures will weaken over the next year due to operational challenges brought on by greater competition and weak subscriber growth.

S&P Rating Services credit analyst Allyn Arden said that while Sprint has made some progress in reducing its exposure to customers affected by subprime problems through the tightening of credit checks, the company's iDEN network, acquired in its 2005 purchase of Nextel, continues to lose high-revenue-generating customers.

Arden added that S&P would consider an outlook revision to negative if Sprint faces further margin pressure due to its inability to moderate subscriber losses and demonstrate improvement on churn. Shares of Sprint Nextel were lately down 47 cents, or 5.4%, to $8.10. The stock is now lower by 38% for the year.

"The substantial amount of rated debt outstanding has prompted numerous investor inquiries on the company's current and long-term business prospects as well as its financial profile," Arden wrote in a research note.

"Standard & Poor's views the Nextel segment as being the weaker part of the overall business given its significant subscriber losses and declining [average revenue per subscriber]."

Sprint should continue to face covenant-related challenges, Arden says, as S&P remains concerned that the margin of compliance will be thin in 2008 and 2009. "Still, we expect the company to take some measures to reduce debt, including the recently announced agreement to sell 3,300 towers for $670 million, which should modestly improve its covenant cushion."