Sprint Shares Whacked on Downgrade

Sprint shares lost about 25 percent of their value Jan. 18 as Fitch Ratings lowered its credit rating. The Fitch downgrades reflect the ongoing concerns over Sprint Nextel's financial and operating results and the lack of visibility as to the company's performance going forward.

Fitch now believes credit metrics will experience greater near-term deterioration with leverage worsening. Sprint's difficulties with stabilizing its core operations and improving the company's competitive position were cited as evidence for the downgrade.

Fitch believes Sprint will experience difficulties in increasing its mix of prime subscribers given the high industry penetration rates, the low postpaid churn rates of its national competitors, the slowing economy and its competitive position. Of course, Sprint has had a churn problem for a couple of years now.

On the other hand, Sprint's continues to hold a good liquidity position and balance sheet. Cash was $2.2 billion at the end of the third quarter of 2007. Free cash flow (FCF) for the last twelve months was $2.2 billion.

The problem is that Fitch expects material free cash flow erosion during 2008.

Still, Fitch sees no issue with ability to service debt obligations. With manageable maturities over the next two years of $1.3 billion coming due in November 2008 and $600 million in May 2009, Sprint Nextel has more than sufficient liquidity through its cash position and bank lines to finance its current maturities and current commercial paper levels.

Considering Sprint Nextel's other strategic initiatives such as and including the share repurchase program and WiMAX deployment, Fitch expects Sprint Nextel to conserve liquidity and conservatively finance those initiatives.

Fitch's negative outlook is an indicator of weaker operating trends and the potential that further erosion could occur to Sprint's operations if the company remains unsuccessful in stabilizing its business.