S&P Cuts Softbank Rating to BB+, Huge Downgrade

Telecom & Wireless

Published: July 8, 2013 4:09 am

Last Updated: July 8, 2013 6:18 am

The price that Softbank has agreed to pay for Sprint Nextel Corp. (NYSE: S) has killed its credit rating, which will make it more difficult to raise money. S&P cut its Softbank rating to BB+, a huge downgrade. The deal with Sprint is widely considered a long shot because it runs a distant third in the U.S. market to AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ). The U.S. market is saturated with about one cellphone for every person. In other words, gaining subscribers is a zero-sum game. Most analysts believe Sprint will need to drop prices for its phones and subscriber services, which will drive its profits further into the red. Sprint has posted awful financials for years.

S&P remarked:

it has lowered its ‘BBB’ long-term corporate credit and senior unsecured debt ratings on Softbank Corp. by two notches to ‘BB+’ and has removed the ratings from CreditWatch. We are withdrawing our debt ratings on the company’s domestic bond issuances (four issuances) at the company’s request. We base the rating action on our expectation that Softbank’s acquisition of U.S.-based Sprint Nextel Corp. (Sprint Nextel; B+/Watch Dev/–), the third-largest wireless service provider in the U.S., will close sometime in July, following various approvals including those of shareholders and the Federal Communications Commission (FCC). The outlook on our long-term corporate credit rating on Softbank is stable. Softbank and Sprint Nextel amended their merger agreement and increased the acquisition amount in response to a counteroffer Sprint Nextel received from U.S.-based satellite TV provider DISH Network Corporation, which expressed its willingness to acquire Sprint Nextel and equity method subsidiary Clearwire Corporation (CCC/Watch Pos/–), a U.S.-based wireless Internet service provider. These developments raise the acquisition cost and cash outflow from Softbank group. Nonetheless, Softbank’s strong internal cash flow generation and growing cash position provide some buffer to absorb the increased acquisition cost on a consolidated basis at the ‘BB+’ rating level, in our view. We base our ‘BB+’ long-term corporate credit rating on Softbank on our assessment that the group has a “satisfactory” business risk profile and a “significant” financial risk profile following the merger.

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