Fitch Expects to Assign a ‘BBB-’ Rating to Sprint Local
Fitch Ratings expects to assign a ‘BBB-’ senior unsecured debt rating to Sprint Local, the business consisting of Sprint’s local telephone division and its Sprint North Supply business, that Sprint Nextel intends to transition to its shareholders. This indicative rating is based on Fitch’s expectation that Sprint Local’s initial capital structure, as announced by Sprint Nextel, will consist of approximately $7.25 billion of debt and include a $300 million annual dividend. Fitch will finalize the ratings upon final closing of the contemplated separation of Sprint Local, which is expected to take from 9-12 months.
The indicative rating reflects the relative size and scale of Sprint Local as the fifth largest ILEC in the country. Sprint Local’s service territory is diverse and includes a mixture of small urban, regional commerce, and rural markets. This operating profile, in Fitch’s opinion, has less overall business risk relative to the operating profile of the regional bell operating companies (RBOCs) and generates relatively stable cash flows. Fitch believes that Sprint Local’s operating profile provides a buffer to competition and technology substitution relative to the more urban-focused incumbent local exchange carriers.
Given Sprint Local’s operational, business, and regulatory risk profile, Fitch believes that a leverage ratio (total debt to EBITDA) of no greater than 3.0 times (x) is appropriate for a low investment-grade credit profile as well as this level of dividend payout. In Fitch’s opinion, the $300 million annual dividend still affords the company with sufficient financial flexibility to invest in plant and growth opportunities balanced against Fitch’s expectation of continued erosion of EBITDA and free cash flow.
The indicative rating incorporates the risks inherent in Sprint Local’s core voice services business stemming from the ongoing technology and wireless substitution and broadband displacement, as well as the expected increase in competitive pressure as cable multiple system operators roll out telephony service. The rating reflects the lack of revenue and service diversity in Sprint Local’s current operating profile as well as the absence of growth opportunities available to Sprint local to mitigate the expected decline of voice service revenues.
Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.