Moody's Cuts Sprint's (S) Corp. Family Rating to 'B1'; Sees Intense Challenges, Limited Ability to Respond

Moody's Investors Service ("Moody's") downgraded several ratings of Sprint Corporation (NYSE: S)("Sprint" or "the company") including the company's Corporate Family Rating ("CFR") to B1 from Ba3, the company's Probability of Default Rating ("PDR") to B1-PD from Ba3-PD, Sprint's senior unsecured rating to B2 from B1 and lowered the company's Speculative Grade Liquidity Rating to SGL-3 from SGL-1. Moody's also assigned a Ba1 rating to Sprint's existing $3.3 billion revolving credit facility. Today's rating action reflects our expectation that intense competitive challenges and Sprint's limited ability to respond effectively will lead to a sustained period of very weak earnings and cash flow. Consequently, leverage is likely to increase, which when coupled with negative pressure on cash flow from installment billing plans and its phone leasing option, is expected to lead to a steady deterioration in Sprint's liquidity position. Sprint's rating outlook is negative reflecting what we believe to be limited ability to reverse current trends in the foreseeable future.

Moody's has taken the following rating actions:

.Issuer: Sprint Corporation

..Corporate Family Rating -- B1, from Ba3

..Probability of Default Rating -- B1-PD, from Ba3-PD

..Speculative Grade Liquidity Rating -- SGL-3, from SGL-1

..Outlook -- Negative, from Stable

..Senior Unsecured Notes -- B2, LGD5 from B1, LGD5

.Issuer: Sprint Communications, Inc.

..Outlook -- Negative, from Stable

..Senior Unsecured Notes -- B2, LGD5 from B1, LGD5

..Junior Guaranteed Unsecured Notes -- affirmed at Ba2, LGD2 from LGD3

..Senior Unsecured Gtd. Bank Credit Facility -- Assigned Ba1, LGD2

.Issuer: Sprint Capital Corp.

..Outlook -- Negative, from Stable

..Senior Unsecured Notes -- B2, LGD5 from B1, LGD5

..Senior Unsecured MTN Program -- (P)B2 from (P)B1

.Issuer: Clearwire Communications LLC

..Outlook -- Negative, from Stable

..Senior Secured 1st Lien Notes -- Ba1, LGD1 from Baa3, LGD1

..Exchangeable Notes due 2040 -- Ba2, LGD2 from Ba1, LGD2

RATING RATIONALE

"Sprint has repeatedly had to lower subscriber, earnings and cash flow guidance due to a combination of operational missteps and rapidly intensifying competitive challenges, especially from a recently revitalized T-Mobile US," said Moody's Senior Vice President Dennis Saputo. We expect the continuation of aggressive price competition will keep pressure on margins, strain liquidity and restrict Sprint's ability to reinvest in its network unless the company successfully raises a significant amount of new capital. "We believe that substantial network investment is critical in order for Sprint to ensure its long-term viability," said Saputo. "Consequently, we expect leverage to increase steadily during the next few years especially if the company is successful in securing much needed low band spectrum," concluded Saputo.

Sprint's B1 CFR recognizes its scale, its valuable spectrum assets, renewed strategic focus under a new CEO and the implicit support from Sprint's parent company and majority shareholder, SoftBank Corp (LT Issuer Rating of Ba1). Offsetting these strengths are high leverage, weak margins, a deteriorating liquidity position and our projection for substantial negative free cash flow through 2017. Near flawless execution across all aspects of the business, including the requirement to quickly redesign and modernize its entire network will be necessary before Sprint can hope to grow its market share in the brutally competitive US wireless industry.

Consumer perception of Sprint's network, including network disruptions in certain markets during its network vision overhaul, its limited amount of low-band spectrum, and failed service plan offerings from earlier this year have resulted in weakened financial and operating performance, resulting in increased leverage and reduced earnings expectations. Sprint platform postpaid net losses totaled 684,000 for the first nine months of CY2014 and we expect postpaid handset losses to persist through 2015 despite renewed focus on this subscriber subset. The new leadership team has launched aggressive service plans aimed at growing postpaid handset customers that, even if successful, will keep operating costs high and preclude margins from expanding meaningfully.

We expect negative free cash flow until at least 2017 due to a combination of weak revenue trends, limited margin improvement and the depressing impact on working capital from increasing uptake of installment billing plans and a phone leasing option . Consequently, we expect Sprint will require significant additional financing. Due to these factors, we expect leverage (Moody's adjusted) to increase above 6x for CYE2015 and to trend higher in 2016.

Moody's believes that Sprint will remain at a significant competitive disadvantage to Verizon and AT&T since the two largest US wireless carriers have much larger and more robust 4G coverage, healthy amounts of low-band spectrum, ample financial flexibility and strong brands. Although Sprint has recently come out with aggressive service pricing plans and new plans to lease select smartphones, Verizon, AT&T and a revitalized T-Mobile US are likely to be reactive in order to protect their respective subscriber bases.

The lowering of Sprint's SGL rating to SGL-3 indicates our expectation that the company will sustain adequate liquidity through the next 12 to 18 months. We believe that additional liquidity will be required because of Sprint's aggressive pricing plans and the negative cash flow impact from installment billing plans. We expect Sprint to remain cash flow negative for CYE2014 and CYE2015. As of September 30, 2014, Sprint had $5.3 billion in cash and short-term investments and $2.4 billion borrowing capacity on its $3.3 billion revolving credit facility and about $1.0 billion under a receivables financing program. As of September 30, 2014, Sprint has $571 million and $754 million of debt maturing for FYE2014 and FYE2015 respectively. There are no significant debt maturities until December 2016 when $2.3 billion of notes mature.

The negative outlook reflects our belief that a strained balance sheet, an increasingly competitive operating environment coupled with a weak brand (due in part to perceived network quality) will limit Sprint's ability to sustain a profitable improvement in its operating performance. Consequently, while churn and subscriber trends may improve over the short-term, EBITDA margins and cash flows will remain weak. Over the long-term, significant challenges loom since capital intensity will need to average at least 15% in order to keep up with usage growth.

Given the negative outlook, a ratings upgrade for Sprint is very unlikely. However, if leverage were to drop and remain below 5.5x, and free cash flow were to turn positive, upward rating pressure could ensue (note that all cited financial metrics are referenced on a Moody's adjusted basis). In addition, significant financial support from Softbank in the form of a debt guarantee or material equity capital infusion could also support Sprint's ratings.

Sprint's ratings would be lowered again if leverage were likely to be sustained above 6.5 x (Moody's adjusted) or if liquidity weakens further (i.e. SGL-4). The most likely causes for another downgrade would be the perception that Sprint's service quality is well below that of the three other national operators causing subscriber counts to fall. In addition, if recent efforts to remove approximately $1.5 billion in operating costs from the business are not realized quickly rating pressure will ensue since liquidity will deteriorate faster than currently expected.

The principal methodology used in this rating was the Global Telecommunications Industry published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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