Could Sprint Become Investment Grade Credit?

December 9, 2013 by Jon C. Ogg

Sprint Corporation (NYSE: S) seems to be in a far better position financially after its merger versus when it was on its own. After seeing two different credit rating agency reports on Monday around a note offering, we cannot help but to ask whether or not Sprint could get an investment grade rating at the major ratings agencies.

Moody’s rated Sprint’s proposed offering of Senior Unsecured Notes at B1, but the underlying corporate family rating for Sprint is “Ba3.” The company’s strength is tied to the ties from Softbank, as well as its valuable spectrum assets, slowly improving operating profile, and substantial liquidity. The offsets to strength, i.e. the weaknesses, are high leverage, weak margins, and the Moody’s expectation of negative free cash flow through 2015. There are also concerns about the cost to grow its market share.

Moody’s forecast that Sprint’s ratings could be raised if leverage were likely to drop below 4.0-times and if free cash flow were to turn positive. Downgrade risks would come if the network upgrade falls behind schedule or doesn’t yield the financial and operational benefits promised; and more risks were tied to postpaid churn rising or a decline in market share,

Standard & Poor’s showed that its ‘BB-‘ issue-level rating and recovery rating of ‘3’ were assigned to the proposed senior notes offering. The ‘3’ recovery rating implies 50% to 70% in recovery if a default comes up. S&P’s ‘BB-” rating comes with a “stable” outlook as well but the firm believes that Sprint has reasonable prospects of reducing leverage at the same time.

24/7 Wall St. does not interpret that any of today’s ratings nor that recent ratings would imply an “investment grade” scenario any time soon. The reality is that Sprint remains a “junk rating” and that may not change until 2015 or even 2016 when it is expected that Sprint will see more positive earnings catalysts.

Sprint shares were up 1.5% at $8.01 in mid-Monday against a 52-week range of $5.61 to $8.75. Its consensus price target from analysts on Wall Street is lower at $7.28 but we saw that Nomura just raised its target up to $10.50 from $6.00 just last week.

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