Sprint Gets $1.2 Billion Lifeline From SoftBank Leasing Unit

  • Lowers Ebitda outlook as a result of the financing deal
  • Cash from lease-back sales can help with looming debt payments

Sprint Corp. is taking $1.2 billion in financing from a phone leasing company created by majority owner SoftBank Group Corp. to help lower equipment costs and relieve pressure on the unprofitable carrier’s dwindling cash supply.

As a result of the deal, Sprint lowered its fiscal 2015 adjusted earnings before interest, taxes, depreciation and amortization to $6.8 billion to $7.1 billion, down from a previous range of $7.2 billion to $7.6 billion, according to a statement Friday.

The shares dropped 5.4 percent to close at $3.83 in New York. The stock has fallen 7.7 percent this year compared with a 1.5 percent rise of the Standard & Poor’s 500 Index.

Sprint sold Mobility Leasing Solutions LLC $1.3 billion worth of phones in a lease-back arrangement that will provide the carrier a total of $1.2 billion in cash. Sprint’s majority owner, Tokyo-based SoftBank, formed the separate leasing unit by using its access to low-interest loans from Japanese banks for financing, Chief Financial Officer Tarek Robbiati said. 

Phone distributor Brightstar Corp., also owned by SoftBank, will handle the leasing unit’s inventory, including resale of used phones to help recover as much of the cost as possible. Brightstar also made purchase agreements with billionaire Terry Gou’s Foxconn Technology Group, a maker of iPhones for Apple Inc., as part of the deal.

The financing vehicle will help Sprint get access to cash at a lower cost than if the company tried to sell debt in the high-yield market, Robbiati said in an interview last week. Under Chief Executive Officer Marcelo Claure, Sprint has slowed customer defections, cut $1 billion in costs and is targeting another $2.5 billion in cuts in an attempt to turnaround the No. 4 U.S. carrier. Still looming are more than $8 billion in loans coming due in the next three years, which is why SoftBank set up an alternate source of financing, Claure said.

“If we show performance on our plan, we should be able to refinance without an issue. At the same time if we use our balance sheet better we could start to de-lever the company,” Claure said in an interview last week.

Phone costs run $10 billion to $12 billion annually, and are Sprint’s biggest use of cash, Claure said.

UBS Securities LLC analyst John Hodulik called the move a step forward in Sprint’s turnaround plan. Access to the financing along with reduced costs “will lower its cash burn from $5 billion in 2015 to less than $1 billion next year,” Hodulik wrote in a note Friday. He has a neutral rating on the stock.

All the major carriers now sell phones on installment plans. For example, a customer agrees to pay the full price of the phone in $25 payments spread over 24 months. Selling these customer payments has become a way for carriers to access cash quickly. T-Mobile US Inc. said earlier this year that it plans to sell debt backed by customer phone payments.

Sprint’s plan is a little different and would be more difficult to replicate by other carriers because it relies on favorable terms from SoftBank and Brightstar, a company that was started by Claure and later purchased by SoftBank. Billionaire SoftBank Chairman Masayoshi Son, who handpicked Claure to make him CEO of Sprint last year, has strong ties in Japan’s banking community, in a country with very low interest rates. Even more beneficial is the agreement to have Brightstar take on the risk of a large used phone inventory. And on the reward side, Brightstar will take an agreed upon portion of the used phone sale proceeds and anything above that price will go back to Sprint. 

Moody’s Investors Service cut Sprint’s rating on Sept. 15 by two levels to the sixth-lowest non-investment grade, citing concern about the American company’s ability to refinance upcoming debt “absent a much stronger commitment from SoftBank.”

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