Sprint Operating Performance Could Mean S&P Downgrade
Sprint Nextel Corp.‘s (S) stock took a hit on Thursday after Standard & Poor’s said it might inch the carrier’s corporate credit rating down a notch.
S&P, the ratings service based in New York, put Sprint on CreditWatch with negative implications, citing Sprint’s weak operating performance through the first nine months of 2009. Sprint lost $594 million in the first quarter, $384 million in the second and $478 million in the third. Analyst Allyn Arden also said Sprint’s credit measures have deteriorated.
Wall Street got a bit panicky about the change during early afternoon trading – Sprint’s shares were down 2.16 percent at $3.17 by 1:12 p.m. Eastern.
Arden said S&P instituted the CreditWatch listing even though Sprint, the third-largest wireless carrier in the United States, has made gains in its prepaid efforts. Sprint sells the Boost Mobile brand and is buying Virgin Mobile USA; the company continues to lose valuable postpaid subscribers, so it’s ratcheting up its focus on no-contract customers. Analysts agree that’s a smart bet – more Americans are switching to month-to-month cell plans as reduced work hours, high unemployment, home foreclosure rates and utility bills continue to drain their bank accounts.
In spite of that, and even though Sprint is showing “some modest improvement” in retaining its postpaid users, Arden said, it’s not enough to ward off the CreditWatch.
“We remain concerned that the company may have difficulty in improving operating trends as industry conditions mature and competition intensifies,” Arden said in a press release.
“Even if postpaid subscriber losses abate,” he added, “and the company continues to right-size its cost structure, EBITDA may not grow sufficiently to materially improve credit measures over the intermediate term.”
The “right-size” comment refers to Sprint’s latest wave of layoffs. The provider is axing about one hundred jobs in its wholesale unit and another 2,000-2,500 company-wide for a projected savings of at least $350 million each year.
Yet, at the same time, Sprint is funneling more money into its Clearwire WiMAX partnership – $1 billion more. It’s also forking out $426 million to buy affiliate iPCS, which was suing Sprint in what promises to be a long and costly litigation process.
However, those pending acquisitions, and the Clearwire investment, didn’t dampen S&P’s view so much as Sprint’s overall performance so far this year.
“We still view the company’s liquidity as adequate,” Arden said.
Arden said S&P will review its ratings on Sprint soon and keep an eye on the provider’s “ability to improve credit measures in 2010.”
“We will also review the company’s strategy to improve post-paid subscriber trends and churn, as well as its plans to deploy 4G wireless services via Clearwire,” said Arden. “Given characteristics of the current financial profile, a downgrade of more than one notch is unlikely.”
