DBRS Downgrades Sprint Nextel to BBB, R-2 (high), Trends Stable

DBRS has today downgraded the ratings of Sprint Nextel Corporation (Sprint Nextel or the Company) and its affiliates to BBB/R-2 (high) from BBB (high)/R-1 (low). The trends are Stable. The downgrade reflects DBRS’s belief that a longer term structural issue for the Company has occurred regarding its business risk profile which is expected to take the balance of 2007 to be stabilized. As such, and despite the expectation that the Company’s financial risk profile should remain reasonable in 2007, DBRS believes that a BBB rating is a more appropriate long-term rating for Sprint Nextel reflecting this increased business risk.

DBRS notes that today’s action removes Sprint Nextel from Under Review - Negative where DBRS placed the ratings on January 9, 2007, after the Company announced revised guidance for 2007 given the competitive environment with potentially higher net debt levels expected by DBRS as a result of plans to continue the remainder of its $6 billion share repurchase program. (See press release dated January 9, 2007, for more details.)

DBRS notes that today’s downgrade is based on four factors. Firstly, DBRS notes that EBITDA and EBITDA margins are expected to continue to be pressured in 2007. This is as a result of high levels of subscriber turnover (including high levels of postpaid churn on its iDEN network and challenges in attaining its share of direct postpaid subscribers on its CDMA network) and ARPU pressure as per-minute voice pricing pressure has not been able to be offset by strong data growth. As a result, EBITDA is expected to decline in 2007 by roughly 12% to a mid point of $11.25 billion with EBITDA margins being pressured from around 30% in 2006 to 27% for 2007.

DBRS notes that this EBITDA pressure is in an environment that remains highly competitive with five national wireless players in the United States all competing for additional growth and scale and with penetration rates now over the 70% level. Furthermore, DBRS notes that Sprint Nextel’s four national competitors continue to experience good postpaid subscriber growth, improved EBITDA margins and healthy growth in cash flow from operations.

Secondly, as a result of the above-noted pressure, DBRS now expects free cash flow for Sprint Nextel to be roughly $500 million for 2007 down from roughly $2.5 billion in 2006 (DBRS-adjusted figures). (This includes roughly $1 billion in non-recurring expenses and roughly $800 million in spectrum rebanding capex.) The reduction in free cash flow along with the Company’s intention to continue to execute on the $4.4 billion remaining under its share repurchase program could also potentially lead to higher debt levels. While the Company ended 2006 with $2.1 billion in cash, DBRS notes that debt levels could increase should the Company fully complete $4.4 billion in share repurchases in 2007.

Thirdly, DBRS is concerned that postpaid churn on its iDEN postpaid subscriber base may continue to be challenged given the Company’s longer-term plans to migrate these subscribers onto its CDMA platform. Despite this concern, the Company has set a goal of improving its overall postpaid churn by the end of 2007 to 2.0%, which DBRS would view as reasonable. As such, the Company has implemented a number of initiatives directed toward its iDEN subscribers and to make its CDMA products and services more competitive. These initiatives include dual technology (iDEN/CDMA) handsets and a bridging technology expected in 2008 (QChat), among others, that will give subscribers the benefits and interoperability of both its iDEN and CDMA networks.

Finally, DBRS notes that the execution risk for the Company has increased as it will need to reposition its services, networks and operations as mentioned above. This is in addition to realizing the $14.5 billion synergies from the merger that created Sprint Nextel in August of 2005. Furthermore, the Company is also undertaking a number of new initiatives including: a national network upgrade on its CDMA network (EV-DO Rev A); a wireless joint-venture with a number of the large U.S. cable companies; and a Wi-Max network deployment with commercial services expected to be introduced in 2008.

DBRS notes that the Stable trend reflects DBRS’s expectations that the Company has begun to take the appropriate actions to correct the above operational issues which should allow it to grow its cash flow from operations and improve its EBITDA margins and free cash flow in 2008. However, should the Company fail to successfully execute on repairing its business profile in this competitive environment, further negative rating action may be warranted.

Notes:
All figures are in U.S. dollars unless otherwise noted.
This rating is based on public information.