Moody's Moves on Sprint

Sprint Corp. (NYSE: FON) is the latest major carrier to have its debt downgraded.

Citing concerns about Sprint's cash flow, liquidity, and business prospects, Moody's Investors Service this afternoon reduced its ratings on the company's long- and short-term debt by one notch, putting it just above the "junk" status.

The downgrade affects about $22 billion in securities, Moody's said.

In a prepared statement, Moody's cited four areas of concern that prompted its downgrade:

  • Sprint's cash flow. Moody's estimates Sprint won't generate "material free" cash flow -- that is, it won't actually be able to report satisfactory cash in its business -- until 2004.
  • Sprint's PCS business. While it's growing, the wireless business still demands lots of capital investment, Moody's said, and "the company remains vulnerable to a wireless price war." Further, Moody's says that 2 million Sprint PCS (NYSE: PCS) subscribers are part of debt-ridden Sprint affiliates.
  • Sprint's long-distance business continues to weaken. The competitive environment in data services pricing and the reduction in voice pricing has hit Sprint's Global Markets Group's long-distance segment hard. Moody's doesn't envision a quick turnaround.
  • Sprint's liquidity. The carrier needs to redo its revolving $5 billion credit facility, which currently calls for $3 billion to come due this August and $2 billion in August 2003, Moody's says. Further, Moody's thinks Sprint needs to refund its accounts receivable securitization program and take a look at selling its directory services business.

"We're disappointed, but this doesn't impact our operations or financial condition," says Sprint spokesman Mark Bonavia. He acknowledges that Sprint is working to renegotiate its $5 billion revolving credit facility and has evaluated the possibility of selling its yellow pages business. "But evaluating doesn't mean we're considering a sale," Bonavia qualifies.

Today's downgrade is the latest of several Moody's has enacted over the past few months. It's also demoted the investment status of securities from AT&T Corp. (NYSE: T) and has put the "junk" label on those of WorldCom Inc. (Nasdaq: WCOM) and Qwest Communications International Inc. (NYSE: Q) (see Moody's Cuts Qwest to Junk).

The news comes as a special blow, since many observers have expressed faith that Sprint has a better chance than most carriers of weathering the current downturn (see Carrier Crisis: Who's Most at Risk? and Sprint Reports Q1 Earnings).

Still, there was a whiff of the positive in Moody's note: Echoing claims made by Sprint CEO William T. Esrey at this week's Supercomm 2002 (see Esrey Talks Tough, Touts Future), Moody's closed its note by stating that Sprint "is the most functionally integrated of all U.S. telcos, meaningfully operating in three distinct segments" -- wireless, long distance, and local access. The ratings agency seems to be hinting that Sprint has the chance to leverage these assets to solve its problems.

At press time, Sprint shares were trading down $0.21 (1.39%) at $14.94.— Mary Jander, Senior Editor, Light Reading
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