Sprint’s ‘Hail Mary’ Financing Buys More Time for Turnaround

  • Sale-leaseback of airwaves is latest asset-backed new debt
  • Stock hits two-year high as biggest fears start to ease

The crisis is over for Sprint Corp. -- at least for now.

A big assist from owner SoftBank Group Corp., led by billionaire Masayoshi Son, has brought the struggling U.S. wireless carrier back from the brink of financial ruin. Son and his team have won raves from Wall Street by mortgaging Sprint’s most valuable assets to buy time to pay off creditors.

A $3.5 billion sale and leaseback of a swath of airwaves, proposed by Sprint on Wednesday, is the third and final part of Son’s plan to use special-purpose entities to turn key assets into sources of cash. Sprint put its network equipment and phone inventory up as collateral earlier this year, getting the company to the point where it can cover the $10 billion in debt coming due in the next three years.

The company has cleared the most immediate hurdle but is still far from out of the woods, said Dave Novosel, an analyst with Gimme Credit LLC.

“This is a great short-term solution, they are on the right path, but they are going to need to generate cash flow to pay off these debts,” Novosel said.

Sprint has more work ahead. The No. 4 wireless carrier in a four-player industry still faces a $37 billion mountain of debt, seven years of ongoing losses and a mature wireless market requiring heavy promotions and price cuts to keep customers from fleeing.

Not oblivious to the challenges, Chief Executive Officer Marcelo Claure has said that if Sprint is revived it will be the “greatest turnaround in history.”

The CEO, who was recruited by Son and took over in August 2014, has dramatically reduced prices, offering half off competitors’ rates in some cases. Just recently he cut Sprint’s unlimited family plan to $140 for four people, compared with $160 at T-Mobile US Inc. Those discounts have helped Sprint begin to consistently add monthly subscribers for the first time in years, but they’re not enhancing the bottom line.

“Can you make enough money when you keep cutting prices?” Novosel said. “At some point you have to start attracting customers without giving away the store.”

Crisis mode kicked in early last year after Sprint’s cash started dwindling. Analysts including Craig Moffett of MoffettNathanson LLC flagged the rate of cash burn and gave the company a year to live based on the money left to fund the business.

Sprint eliminated 2,500 jobs, or about 7 percent of its workforce, to help reach $2 billion in annual cost reductions. And even though coverage improvements have been central to Claure’s turnaround plan, the company slashed network spending this year by 36 percent to $3 billion.

Click here for a Bloomberg Intelligence primer on Sprint

To address the cash concern, Chief Financial Officer Tarek Robbiati worked for over a year to get the asset financing deals together. Going to the costly high-yield market wasn’t an option for Son, so Robbiati had to create loans using assets as collateral -- sort of like selling furniture to the landlord to pay for rent.

“It’s credit positive in that it will provide them with liquidity, but ultimately they still have an enormous debt burden and they’re competing against better capitalized players in a very commoditized space,” said Margie Patel, a money manager at Wells Capital Management who used to hold Sprint debt. “I think it’s one of the weaker links in the telecom space. I wouldn’t look at it.”

The wireless spectrum Sprint proposed to mortgage on Wednesday is particularly valuable property. Wireless carriers pay billions of dollars for government licenses to use those airwaves to make sure they can offer ample coverage across the country, with enough capacity to stay available when demand spikes.

Crown Jewel

Sprint owns the largest piece of high-frequency spectrum in the U.S., located in what’s called the 2.5-gigahertz band. It’s been the crown jewel of Sprint’s assets and crucial to Claure’s plan to provide enough wireless capacity to one day have the fastest network in the land.

The airwave deal will work similarly to the phone inventory and network equipment transactions. Sprint is selling the spectrum to a wholly owned special-purpose entity, which will borrow against the asset by selling notes in a private placement. The spectrum Sprint is mortgaging is being used in about 77 percent of all of Sprint’s 2.5 gigahertz enabled sites and 33 percent of Sprint’s 1.9 gigahertz enabled sites.

The idea is to buy time to allow network improvements to kick in and Sprint’s reputation to improve with customers.

“This latest move continues what we consider a ‘hail Mary’ strategy for Sprint as it further levers up a debt-laden balance sheet through creative financing techniques,” Jefferies LLC analyst Mike McCormack wrote in a note Wednesday. “The bet is clearly on getting the network quality on par, and improving subscriber trends in hopes of buying back these assets in the future, but with no end in sight to competitive pressures, we remain highly skeptical.” McCormack has an underperform rating on Sprint.

Sprint spokesman Dave Tovar said the company has been making progress on several fronts including monthly subscriber growth and a lower cost of capital. He said asset-based financing has helped raise $7.9 billion and “gives us time to stabilize the business.”

Moffett, who had given Sprint a year to live, agrees the deals have given Sprint more time. “The financing is good on two counts: it eliminates the liquidity risk, and it lowers their cost of capital,” he said Wednesday. “On the other hand, they have done nothing to put themselves on the path to real sustainability.”

Shares of Sprint fell 2.4 percent to $6.62 at 10:11 a.m. in New York Thursday amid a broader market slump that pushed the S&P 500 Index down 1.1 percent. On Wednesday, the stock climbed at one point to $7.01, the highest since September 2014, as investors noted the progress. Its most actively traded bond, $4.25 billion of 7.875 percent coupon notes due in 2023, rose 0.44 cent to 101.25 cents at 3:31 p.m. in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The bonds have gained 26.5 cents so far this year.

While Sprint’s ability to turn assets into cash has relieved near-term pressure, the road to revival is still long, Novosel said.

“It’s not champagne time yet. Getting to cash-flow positive sometime next year still may be Sprint’s biggest test,” he said. “If they keep improving they might be able to at least start putting the bottles on ice in July.” 

— With assistance by Claire Boston, and Kenneth Pringle

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE