Tough times for Moto, Sprint
Two of the biggest names in the U.S. wireless industry — Motorola and Sprint Nextel — last month saw their credit ratings downgraded to “junk” status by separate agencies, limiting their access to financial markets as new management teams try to reverse the downward fortunes of the struggling companies.
For Motorola, the portion of the company that provides services to governments and public safety, including private LMR networks and handsets, continues to healthy. However, this strength has not been enough to offset the losses sustained in the company’s high-profile mobile-devices unit, which reported a 31% revenue drop during the third quarter.
In a research report, Standard & Poor’s credit analyst Bruce Hyman stated the downward trend is “not likely to be reversed over the intermediate term, leading to depressed profitability and returns, adjusted debt leverage over 4x and substantially diminished free cash flows.” Standard & Poor’s downgraded Motorola’s credit rating to BB+, the highest tier of “junk” credit ratings. In a statement, Motorola disputed the ratings downgrade, claiming that the action “undervalues the strength of the company’s balance sheet and the substantial efforts under way to improve the company’s profitability.”
The credit-rating downgrade contributes to a bleak outlook for Motorola, said Roger Entner, senior vice president of research in Nielsen’s telecom practice.
“It’s losing money as we speak, and it’s only a matter of time until they have to raise money,” Entner said. “In the best of times, a company with a junk-bond rating has to give a higher yield. In the worst of times, as we have right now, it can make it extremely difficult — if not impossible — to get funding.”
Sprint Nextel faces similar issues after Moody’s Investors reduced its debt rating to “junk” status. Since Sprint bought Nextel in 2005, the company has seen a steady exodus of customers from the iDEN network, which boasts a push-to-talk capability that traditionally has been popular with public safety for non-mission-critical communications.
In downgrading Sprint Nextel’s debt rating to Ba2, Moody’s noted the wireless carrier’s diminished market position and the fact that a turnaround will be difficult, given the tough economy and the dominance of AT&T Mobility and Verizon Wireless in the U.S.
“[A credit rating of ‘junk’] certainly doesn’t make things any easier for them,” Entner said of the job facing the management team under CEO Dan Hesse, who was hired in December 2007.
While declining to comment specifically on the Moody’s downgrade, Sprint Nextel spokesman Scott Sloat said the third-quarter report highlighted some positive financial points for the company.
“As of our last earnings call, we had generated $1.1 billion in free cash flow, we ended the third quarter with $4.1 billion in cash, and we had paid down $1 billion in debt during the quarter, so we’re making progress,” Sloat said.
The Moody’s downgrade should not affect the company’s ability to fund 800 MHz rebanding. As part of the FCC order mandating rebanding, Sprint Nextel established a $2.5 billion letter of credit to ensure that the relocation effort could be completed, regardless of the company’s financial health.
To date, Sprint Nextel has not used the letter of credit to pay rebanding costs, Sloat said. In fact, the company has been allowed to reduce the letter-of-credit commitment to $2.1 billion, which the 800 MHz Transition Administrator has deemed to be adequate to cover the remaining costs of the massive project.
