S&P Cuts Sprint Nextel's Credit to Junk
Standard & Poor's Rating Services lowered
Sprint Nextel's
(S) - Get Report
credit ratings to junk status Thursday, citing the company's worsening performance and mounting debt.
S&P downgraded the company's corporate credit and senior unsecured ratings to BB from BBB-, concluding that the company'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
earnings before interest, taxes, depreciation and amortization."
In February, S&P placed Sprint on CreditWatch after the company posted disappointing fourth-quarter results. Sprint lost 1.2 million post-paid subscribers in the quarter, and S&P said that accelerating customer attrition is unlikely to improve. Because of the downgrade, S&P said all ratings are removed from CreditWatch.
"The ratings on Sprint Nextel reflect declining revenue and margins due to the continued erosion of its subscriber base, lower
average revenue per subscriber, and high churn relative to its peers, as well as our expectations for increased leverage over the next few years," S&P Ratings said in a release. "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 that its outlook for Sprint is stable as it believes that credit measures will deteriorate over the next year due to ongoing operational problems, as well as the prospect for greater competition, especially as subscriber growth for the industry begins to slow.
"We could revise the outlook to negative if subscriber losses accelerate or churn rises beyond expectations, resulting in further margin pressure and even weaker credit measures," the firm said. "Although less likely, a positive outlook would be considered if Sprint Nextel is able to stabilize subscriber losses and ARPU and improve churn levels such that leverage is sustained."
The firm also assigned a '3' recovery rating to Sprint's senior unsecured debt, meaning that it expects a meaningful recovery in the event of payment default, usually in a range of 50% to 70%.
Investors and analysts are now waiting for Fitch Ratings to weigh in. In March, Fitch warned that Sprint's debt rating could be downgraded by one step from BB+ to BB. Fitch cited low expectations for the company's performance for 2008 when it downgraded Sprint's long-term issuer-default rating to BB+, the highest junk rating, from BBB-.
Shares of Sprint turned positive on the news, climbing 6 cents, or 0.8%, to $8.05. Among its competitors,
Verizon
(VZ) - Get Report
was gaining 1.8% to $39.16,
AT&T
(T) - Get Report
was higher by 3.2% and
Qwest
(Q)
was up 1.4%.