Fitch: Sprint's future still iffy despite network upgrades

Sprint (NYSE:S) has a stable financial outlook, but its financial profile will remain weak through at least 2014 as industry trends and competitive pressure conspire to keep the company from fully exploiting its network investments and spectrum holdings, according to Fitch Ratings.

Fitch issued the outlook as it announced ratings for Sprint subsidiary Clearwire's new $300 million first priority secured notes and $629 million exchangeable notes. Ratings for those notes "reflect the substantial overcollateralization of spectrum assets underlying the debt since the $2.8 billion redemption of Clearwire secured notes at the beginning of December 2013," Fitch said.

Clearwire's spectrum holdings total in excess of 47 billion MHz-POPs consisting of about 41 percent owned and 59 percent leased spectrum. Those massive spectrum holdings are widely considered to be Sprint's ace in the hole, as the company intends to use Clearwire's 2.5 GHz spectrum to boost network capacity as well as available bandwidth.

Under a multi-year project called Network Vision, Sprint has been modernizing its network, including adding LTE.  And in late October, the operator announced Sprint Spark, a tri-mode (800/1900/2500 MHz) LTE service that will start off using 20 MHz of spectrum. By using LTE Advanced carrier aggregation on the TD-LTE network planned for Clearwire 2.5 GHz spectrum, Sprint has said it could have 60 MHz of spectrum available for LTE in some markets.  

The operator is moving to lay out a cumulative $28 billion in capital spending over the next four years on its network improvements.

In addition, Sprint continues to offer unlimited data packages, which set it apart from competitors, but the sustainability of this offer will be questionable if and when Sprint's network becomes more loaded with customers. And it will take more than improved service and unlimited data to attract customers. Fitch contends that Sprint faces material execution risk across its numerous strategic objectives.

Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T) are much better positioned "to leverage their scale, capital investment, subscriber bases and spectrum portfolios to capture additional share and monetize future growth, particularly through the share data plans," the ratings agency said.

Yet all U.S. wireless operators must contend with mobile industry maturation, which is expected to result in contraction of postpaid and prepaid additions. Sprint is already suffering from postpaid subscriber defections, and Fitch said headwinds will continue to challenge the operator into 2014.

Sprint gained $5 billion of new capital from selling a 78 percent stake to SoftBank (Sprint shareholders got $16.6 billion). But Sprint will likely suffer a cash deficit during the next two years; the deficit sat at $10 billion as of the carrier's June 2013 proxy filing.

Fitch said prospects should brighten for Sprint as it pursues cost-reduction efforts that could drive $2 billion in savings, and the company may see significant margin expansion in 2014-2015. Improved cash generation and reduced capital investment could lead to free cash flow by the end of 2015.

In addition, Fitch said expansion of cellular service to new mobile broadband devices and tablets as well as machine-to-machine opportunities have the potential to produce new revenue streams for Sprint.

Fitch expects the operator will maintain at least $2 billion of cash going forward and said Sprint's current cash position "will help fund on-going operating deficits related to the capital investment and the expected auction for TV broadcast spectrum."

However, Fitch warned it would be detrimental for Sprint to make additional material acquisitions or pursue aggressive spectrum purchases that would significantly increase its leverage.

For more:
- see this Fitch Ratings release

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