Sprint's debt rating drops to 'junk' status

By Angela Gunn | Published December 11, 2008, 3:22 PM

The nation's third largest mobile provider took a hit on its stock price Thursday after Moody's Investors Service downgraded Sprint Nextel's senior unsecured debt rating to Ba2, known more commonly as the "junk" rating.

Sprint's stock has dropped 84 percent since the beginning of 2008. It traded at a low of $1.35 in late November, though it's currently back up to the low $2 range. (At press time, shares were trading on the New York Stock Exchange at $2.09, down $0.33 on the day.

The downgrade isn't anything sudden, though; Moody's has been reviewing the company's rating (previously Baa3, which isn't pretty but still qualified Sprint's stock as investment-grade) since May. In fact, say Moody's analysts, things are better with the company than they were a year ago. But a difficult economy isn't going to make further improvement anything less than a huge challenge.

On Monday, analysts at Morgan Stanley issued a report giving the stock an Underweight rating and posting the stock's target price at $1.

You can't say the company's not trying. In addition to its recent Xohm (Clear) rollout -- a major launch at what most observers would agree is an extremely tough time for new projects -- the company has offered voluntary buyouts to some percentage of its 57,000 employees. It's believed that once the company has a sense of how many employees will bow out on their own, decisions will be made about further cuts.

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But it's a delicate balance for Sprint, which also suffers from chronically dismal customer satisfaction rankings. CEO Dan Hesse's series of plain-talking commercials have garnered a certain amount of respect, as have efforts to tie customer retention to employee bonuses -- and tie customer complaint resolution to managers' to-do lists.

But in a Bloomberg interview earlier this week the company stated that it may close as many as 20 call centers in 2009. Sprint Nextel has lost around 3 million contracted subscribers in 2008, and though it hopes to slow that pace next year it's possible that shrinkage will continue until early 2010.

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