Subject: [NEXTEL-1] Moody's revises Nextel Comms outlook to stable

From: [email-masked]
Date: Fri, 31 Jan 2003 18:44:09 -0500

http://biz.yahoo.com/rf/030131/telecoms_nextel_moodys_1.html

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Reuters

Moody's revises Nextel Comms outlook to stable
Friday January 31, 10:22 am ET

(The following statement was released by the rating agency)
Approximately $15 Billion of Debt, Credit Facilities, and
Preferred Stock Affected
NEW YORK, Jan 31 - Moody's Investors Service today improved
the rating outlook for Nextel Communications, Inc. and its
wholly owned subsidiary Nextel Finance Company to stable from
negative. In addition, Moody's confirmed Nextel's SGL-1
Speculative Grade Liquidity Rating.
The affected debt ratings are:
Nextel Communications (amounts shown are accreted values at
9/30/02)
Senior Implied Rating B1
Issuer Rating B3
Speculative Grade Liquidity Rating SGL-1
$776 million 10.65% Senior Discount Notes due 2007 B3
$1.1 billion 9.75% Senior Discount Notes due 2007 B3
$284 million 4.75% Senior Convertible Notes due 2007 B3
$1.4 billion 9.95% Senior Discount Notes due 2008 B3
$300 million 12% Senior Notes due 2008 B3
$1.8 billion 9.375% Senior Notes due 2009 B3
$724 million 5.25% Senior Convertible Notes due 2010 B3
$926 million 9.5% Senior Notes due 2011 B3
$608 million 6% Senior Convertible Notes due 2011 B3
$581 million 13% Series D Exchangeable Preferred Stock due
2009 Caa2
$690 million 11.125% Series E Exchangeable Preferred Stock due
2010 Caa2
$87 million Zero Coupon Convertible Preferred Stock due 2013
Caa2 Nextel Finance Company
$6.0 billion senior secured credit facility Ba3
The improvement to the rating outlook reflects the
remarkably stable operating and financial performance of the
company in the face of an increasingly competitive wireless
marketplace, as well as the substantial delevering the company
has achieved, notionally through improvements in measured
EBITDA, and absolutely through the early retirement of $2.6
billion of debt and preferred securities in the 2nd and 3rd
quarters of 2002. The SGL-1 rating continues to reflect
Nextel's very good liquidity due to its sizeable cash balance
($2.4 billion at 9/30/02) and improving cash flows.
Moody's had changed the rating outlook to negative for Nextel
Communications in June 2002, when we placed the rest of the
non-investment grade wireless ratings on review for possible
downgrade.
At the time, Moody's expressed concern that the drastic
deceleration of subscriber growth in the industry combined with
the launch of new or recently upgraded networks by the major
wireless operators would exacerbate already intense competition
in the industry. This heightened competition was felt to
disproportionately affect speculative grade operators, as they
would be typically require more growth to support their heavier
debt burdens and would lack the financial flexibility to
compete compared to the investment grade rated carriers.
Since that time, Nextel has nonetheless continued to grow
its market share of subscribers while maintaining its industry
leading subscriber metrics, with high revenues per user and low
churn. At the end of 3Q02, the six national wireless carriers
had increased their subscriber bases (including through
acquisition) by an average of 14%, while Nextel's base grew by
24% without the benefit of acquisitions. ARPU of $71 per month
is well above an industry average closer to $50, and monthly
churn of 2% remains much better than the industry average of
around 2.7%. In addition, Nextel has wrung substantial
improvements to the company's margins through cost
efficiencies, many borne out of the major outsourcing
agreements the company struck in the beginning of 2002. Nextel
has also greatly reduced its capital expenditures through
improvements in its network planning and utilization, and plans
on further improvements in 2003 to keep capital expenditures
substantially below prior year's levels.
The combination of these achievements has made Nextel a
free cash flow generator. Cash provided by operations through
3Q02 of $1.5 billion exceeded capital expenditures of $1.4
billion for the same period. The gap between cash provided by
operations and capital expenditures widened throughout the
first nine months of 2002, and Moody's expects this trend to
continue. The financial risk of the company has also been
substantially reduced through the repurchase of $2.6 billion of
the company's debt and preferred securities (or over 15% of the
amount outstanding at the beginning of 2002) for $689 million
in cash and 144 million shares of common stock. These
retirements will reduce interest and dividend requirements by
over $235 million annually, greatly improving the company's
financial flexibility.
This demonstration of competitive strength in a
deteriorating market combined with the substantial reduction in
financial risk lead Moody's to view the ratings outlook as
stable. Nevertheless, Moody's remains concerned about the
wireless industry in general as subscriber growth continues to
slow and the general economy remains weak. Further, longer term
Nextel's free cash flow profile is likely to come under
pressure.
While Moody's believes that the company's leading ARPU can
suffer some dilution before affecting the company's credit
quality, movements in the company's churn rates will be
monitored closely. Also, the company's reduced capital spending
program runs the risk of eroding network quality. Network
usage, as measured in minutes of use, increased 40% in 3Q02.
Depreciation of Nextel's PP&E is running at approximately $1.6
billion per year. As network usage is expected to continue to
grow at double digit rates, capital spending at or below the
level of depreciation is unlikely to be sustainable, longer
term.
Positively, Moody's expects that Nextel will be able to
maintain its superior subscriber metrics through its
differentiated service offering. As the company is able to
further reduce debt with cash provided by operations, and the
risks and rewards of the spectrum swap proposal before the FCC
become clearer, the ratings outlook could be further improved.
Based in Reston, Virginia, Nextel Communications is a
provider of wireless communications services with LTM revenues
of $8.3 billion serving over 10.1 million subscribers at
September 30, 2002.

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