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Fitch Rates Sprint Spectrum Securitization Series 2016-1 Class A-1 Notes 'BBB'; Outlook StableFitch Ratings has assigned a 'BBB'/ Stable Outlook rating to the $3.5 billion series 2016-1 class A-1 notes issued by Sprint Spectrum (News - Alert) Co LLC (the Master Issuer), Sprint Spectrum Co II LLC (Co-Issuer II) and Sprint Spectrum Co III LLC (Co-Issuer III). In addition, Fitch is withdrawing the series 2016-1 class A-2 and A-3 senior secured notes expected rating as these debt issuances are no longer expected to convert to final ratings. A full list of rating actions follows at the end of this release: The issuance, which is the first out of a $7 billion program, is backed by hell-or-high water lease payment obligations from Sprint (News - Alert) Communications Inc. (SCI), which in turn are guaranteed by Sprint Corporation and all of SCI's subsidiaries that guarantee the existing credit agreements. As part of the financing structure, the wireless spectrum licenses that give right to the lease payments were contributed to wholly owned subsidiaries of the issuing entity (true sale). The financing is also collateralized by a pledge of the equity of the license-holding entities and certain transaction accounts. Notes will be rated to timely payment of interest and ultimate payment of principal by the legal maturity date. Legal final maturity is 18 months after the expected maturity of the A-1 notes. The rating contemplates; SCI's IDR of 'B+'; its going concern assessment (GCA) score (GCA 2); an affirmation factor of 'High' indicating the likelihood of the company's affirmation of the related lease obligations following a bankruptcy filing; an 18-month liquidity facility and recovery prospects. The rating is capped at the 'BBB' level given the lack of significant precedent, limited data related to valuations and uncertainties as to the timing of foreclosure and recoveries. KEY RATING DRIVERS Credit quality of the Lessee: Cash flows backing the transaction will come from hell-or-high-water lease payment obligations from SCI (the lessee). The Issuer Default Rating (IDR) of the lessee acts as the starting point for the analysis. SCI, a wholly owned subsidiary of Sprint Corporation (Sprint), is rated 'B+'/Stable Outlook. Performance Risk and GCA Score: Timely payment on the bonds may depend on the ongoing performance of SCI as the lessee. SCI's GCA score of 2, which acts as a cap for the assessment of Sprint's continuing to operate, could allow for a four-notch differential between the Sprint IDR and the issuance probability of default (PD) rating. Strategic Nature of the Assets: The affirmation factor (i.e. the likelihood that Sprint would view this obligation as strategic and would affirm the lease in the event of a bankruptcy) is considered 'High' by Fitch. The strategic importance of the assets to the lessee's operations coupled with the structural incentives in place supports this assessment. A 'High' assessment allows the transaction to obtain the maximum four-notch uplift from SCI's IDR, which is commensurate with the GCA 2 score. Liquidity Facility in Place: The transaction benefits from an 18-month liquidity facility. This facility can be used if there is any disruption in lease payments during a Sprint bankruptcy or reorganization process. Additionally, in the case of lease rejection by Sprint, the liquidity will be used to meet timely interest payments during the foreclosure, re-marketing and sales process. Recovery Potential: While sales proceeds are expected to be sufficient to repay all outstanding debt, even significantly stressed recovery levels would generate a high level of recovery on the notes. Fitch ran several stressed assumptions on the valuation with recoveries deemed outstanding (greater than 90%) in the majority of scenarios. This recovery benefit would allow the transaction to obtain a two-notch benefit from the 'BBB-' PD rating. However, the rating was capped at 'BBB' for the reasons described below. Transaction Rating Capped: Although the IDR of the corporate entity, the GCA score, the affirmation factor and the potential recovery proceeds allow for a rating of 'BBB+', the lack of significant precedent, the limited data related to valuations and uncertainties related to the timing of foreclosure and recoveries are why Fitch elected to cap the transaction rating at 'BBB'. Back-up Manager Role: In Fitch's view the role of Midland Loan Services (backup manager), a division of PNC (News - Alert) Bank, N.A. ('A+'/Outlook Stable), as backup servicer and control party provides additional protections and safeguards related to the collateral. Given Sprint's role as the manager of the collateral, the backup manager protects investors from misaligned incentives. In addition to day-to-day oversight, the backup manager plays a key role related to the foreclosure process, as in an event of a manager replacement it will direct the sale of the business and/or liquidation of collateral, with approval of controlling class representatives. Asset Isolation and Legal Structure: Notes define default as occurring when an interest payment is missed (after the expiration of the five-day grace period) or in the event that full principal is not repaid at legal final maturity. The proposed structure also contemplates events, such as lease payment default and certain manager termination events, in which the investors can dispose of the collateral before an event of default is declared. The trust structure used allows creditors to gain access to the collateral in the case of a collateral disposition event. These elements may not only increase overall recovery, but they increase the willingness of the lessee to meet the monthly lease payments on a timely basis. RATING SENSITIVITIES Although the rating is sensitive to changes in the credit quality of SCI, the capped 'BBB' rating would be able to withstand a one-notch downgrade of Sprint's IDR. However, a significant downgrade of SCI's IDR could lead to a rating downgrade of the notes. In addition, a change in Fitch's adjusted valuation of the collateral that would result in a reduction of the recovery prospect estimations may lead to a rating downgrade. DUE DILIGENCE USAGE {No third-party due diligence was provided or reviewed in relation to this rating action. Fitch assigns the following rating: - Series 2016-1 5-year class A-1 notes 'BBB'; Outlook Stable. Fitch also withdraws expected ratings assigned to the following classes of notes as the forthcoming debt issuances are no longer expected to convert to final ratings: - Series 2016-1 7-year class A-2 notes; - Series 2016-1 10-year class A-3 notes. Additional information is available at www.fitchratings.com. Applicable Criteria
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01
Sep 2016)
Criteria for Rating Caps and Limitations in Global Structured Finance
Transactions (pub. 16 Jun 2016)
Future Flow Securitization Rating Criteria (pub. 14 Sep 2016)
Global Structured Finance Rating Criteria (pub. 27 Jun 2016) Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
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