Credit rating agency gets moody over Dish financial foundations

Credit rating agency Moody’s has dampened enthusiasm for US wireless entrant Dish, downgrading its credit rating on the grounds it will need a major cash injection to be a valid competitor.

There has always been scepticism to the assertion Dish would be an adequate alternative to maintain competition following the T-Mobile US and Sprint merger, but this is a worrying move from Moody’s considering the deal is done and the industry has now started down an almost irreversible path.

Moody’s has now downgraded the Dish corporate family rating to B1 from Ba3, probability of default rating to Ba3-PD from Ba2-PD and senior unsecured debt ratings to B1 from Ba3.

“We believe that there is increased risk burdened by bondholders as Dish continues with its plan to build out a state of the art 5G IoT broadband network until it secures a material equity investment and/or partner,” the research note states. “We also believe risk is rising due to the continuing secular decline of DBS’s [a wholly-owned Dish subsidiary] pay-TV subscriber base.”

In short, Dish owes a lot of money, has committed to spending another significant chunk and traditional revenues aren’t looking attractive enough. Although it is a slightly dumbed down explanation, the below table should make those less knowledgeable of financial jargon a bit more comfortable.

The line in the sand which no corporation wants to cross is between Baa3 and Ba1. Once you get into the ‘non-investment grade speculative’ category the ability to source funds, either borrowing from banks or raising capital from investors is impacted. Dish was already below this line, making it a less attractive bet for Wall Street, but now is has dropped down one rung further.

This should be considered worrisome as it is a double-edged sword; Moody’s is suggesting Dish needs a considerable cash injection to fulfil its ambitions, but it simultaneously warning the financial markets against lending to the firm.

From a financial perspective, Dish is viewed as a speculative bet because of straining spreadsheets. Over the years, Dish has acquired more than $21 billion in spectrum licences, funded by cash flow from the DBS business and leveraging the DBS balance sheets. The firm has also estimated it will need an additional $10 billion to build a 5G network, a figure some belief is conservative; Moody’s is one.

As Dish has already been borrowing against its existing operations, Moody’s is concerned it will struggle to raise more funds, especially considering revenues are declining at a worrying rate. As a result, Moody’s does not believe Dish will generate enough cash or have enough cash on hand to meet its $2 billion principal payment each in June 2021 and July 2022. This will mean Dish will have to refinance a portion of its debt.

That said, Moody’s said it could upgrade the company’s rating should there be a change in fortunes;

However, Dish might also be downgraded further. If no strategic partner is found and Dish decides to enter the spectrum auctions later this year, Moody’s would frown. Should unsecured debt be refinanced with secured debt, the rating could drop. And if subscriber losses decline at a faster pace than historical trends, it would be a bad sign. It appears the hand is hovering over the downgrade button, waiting for something else to go wrong.

This might be viewed as vindication for the opponents of the T-Mobile/Sprint merger, those who suggested Dish would not be a viable alternative. However, the reward of being right might not be much consolidation considering the deal has already been approved. Had these ratings appeared a few months ago, it might have had a material impact on the decision to merge T-Mobile and Sprint operations, but as they say, hindsight is always 20-20.

These are all concerns for the financial segments, but what is worth noting is there are worries in the technological crowds also.

Dish has stated it plans to build a software-defined, cloud and OpenRAN-based network, learning from the Rakuten experiment in Japan. This approach to network deployment is theoretically very attractive, but it will make use of technologies in their early days of development.

One outcome of the Rakuten network deployment is disaster. Something will go wrong, as it always does the first time a new idea plays out in the market. Should these setbacks be anything more than minor, the Dish bet on OpenRAN and Rakuten could look suspect.

The US needs Dish to be a viable alternative to T-Mobile, AT&T and Verizon. Three operators is not the most secure position for a telecoms market to be in, but when you take into account the size and complexity of the US telecoms landscape for network deployment, and the already high price for data, the need for another network provider is compounded.

Is OpenRAN given a disproportionate amount of attention for progress thus far?

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