Weekly wireless ratings roundup

Following is a list of debt and credit upgrades and downgrades for wireless companies by financial and investment firms this week:

• Standard & Poor’s revised its outlook on Sanmina-SCI Corp. to negative from stable following what S&P called disappointing earnings for the second quarter ended April 2. S&P affirmed the company’s BB- corporate credit rating. Sanmina-SCI is an electronics contract manufacturer. Its products in the wireless industry include wireless base stations and radio-frequency equipment.

   

• The long-term ratings of Verizon Communications Inc. and its affiliates remain on Standard & Poor’s CreditWatch with negative implications following news that MCI has accepted Verizon’s latest acquisition offer of about $10.5 billion. S&P said a successful combination of Verizon and MCI could result in a downgrade to Verizon’s corporate credit rating by no more than one level to A. MCI’s corporate credit rating was placed on CreditWatch with positive implications in February when Verizon first made a bid for the long-distance giant. Verizon and Qwest Communications have been engaged in a bidding war for the company ever since. “The negative CreditWatch listing for the Verizon ratings reflects the potential for weaker financial parameters at the company, as well as a possible weakening of Verizon’s overall business risk position,” said Standard & Poor’s credit analyst Rosemarie Kalinowski. “The initial financial impact on Verizon will not be significant, given MCI’s large cash position and the relative size of the companies. However, the CreditWatch placement incorporates concerns regarding prospects for material cash generation at MCI over the next few years. In 2004, MCI generated negative free cash flow, and Standard & Poor’s does not expect this metric to improve significantly over the next few years given the continued decline in revenues and low EBITDA margins.” S&P also removed Qwest’s ratings from CreditWatch after it announced it would no longer pursue a combination with MCI. The company had been on CreditWatch with negative implications while it competed with Verizon for MCI. The ratings firm affirmed Qwest’s BB- rating.

   

• Merrill Lynch reinstated its sell rating on Qwest following its decision to withdraw from bidding for MCI, saying a standalone Qwest cannot achieve the benefits a deal with MCI would have offered and that the company’s “spirited” bid for MCI highlights its difficult strategic situation.

   

• Merrill Lynch upgraded its overall rating on Internet and wireless to overweight and downgraded its rating on IT hardware and storage to equal weight and supply chain to underweight. In related news, the firm said first-quarter results among the top-five wireless carriers showed better-then expected subscriber growth and in-line to better-than-expected revenues. However margins came in in-line to below expectations. Merrill Lynch said Verizon Wireless and Nextel both have already achieved operating efficiencies, while Cingular, Sprint and T-Mobile USA have room to expand margins. The firm raised its U.S. wireless industry estimate from 18 to 20 million net additions this year, in line with 2004 levels. Prepaid, it said, contributed about 15 percent of industry subscriber growth during the first quarter and churn reached historical lows, with national carrier churn declining an average of 2 percent. Merrill Lynch rates Sprint, Alltel and U.S. Cellular at buy.

   

• Prudential upgraded its sector rating on telecom services from neutral to favorable, saying it has been and continues to be bullish on wireless but also is now “favorably disposed” to wireline services as well.

   

• Standard & Poor’s raised its corporate credit rating on Nextel Partners Inc. from B+ to BB and its unsecured debt rating from B- to BB. The company said the upgrade reflects improvement in the company’s debt leverage, continued growth in EBITDA and an improving free cash flow position, as well as the expectation that strong operating metrics will continue.

   

• JP Morgan upgraded its rating on Cincinnati Bell Inc., saying it believes the company’s operating performance should stabilize going forward. In addition JP Morgan said Cincinnati Bell’s postpaid subscriber growth and wireless margin should improve in the second half of this year as the company nears completion of its GSM conversion.

   

• Fitch Ratings placed American Tower’s ratings on Rating Watch Positive on news of its planned merger with SpectraSite Inc. Fitch currently rates the company’s unsecured notes at B+, its senior secured credit facility at BB and its senior subordinated debt at BB-. Fitch cited the deleveraging aspects of the transaction as positive for American Tower’s credit profile.

   

• CIBC World Markets downgraded its rating on shares of both SBC and Verizon and lowered earnings per share estimates. CIBC noted concerns about deterioration in access line losses due to increased wireless and Voice over Internet Protocol cannibalization. “The competitive intensity has mostly come from wireless price declines, which are at price points that are cheaper than wireline,” said CIBC in a research note. “We expect wireless cannibalization to continue, and VoIP competition should create most of the incremental access line declines in the next two years.” CIBC also pointed to long-distance acquisitions and expensive upcoming network upgrade cycles as reasons for the downgrades.