Going broke slowly: a guide to Sprint's $33 billion debt dilemma
Sprint Corp.'s top executives are confidently promising a revival that will lead to the "greatest turnaround in history."
But their financing plans have some in the industry wondering whether the debt-ridden mobile-phone carrier is mortgaging its future to buy itself time with creditors.
Sprint says the strategy will enable it to "break even" on a key measure of cash flow for the first time in five years and help repay debt. Yet to do that, the company had to slash network spending to the lowest since 2010 and is putting up phones, equipment and airwaves as collateral in a string of unconventional loan deals brokered by its parent, SoftBank Group Corp. What's more, Sprint started measuring cash flow in a way that enabled it to post a much smaller deficit than traditional accounting would allow.
"The fact that the company needed to go this route in the first place is indicative of its precarious financial position," said Dave Novosel, a debt analyst at Gimme Credit.
With $10 billion in debt coming due in the next three years, Sprint has little choice. In the saturated U.S. market, costly missteps and price wars have left Sprint -- the No. 4 wireless carrier in a four-player business -- with seven straight years of losses. And crippled by its mountain of debt, the company has little extra money to build out its ultrafast network, the centerpiece of Chief Executive Officer Marcelo Claure's grand turnaround.
In April, Sprint raised $3.3 billion by selling and then leasing back some of its phone inventory and network infrastructure, and using the assets as collateral for the loans. It plans to do a similar deal with some airwaves. The company also recently gave up rights to some income from customers' future bill payments for a smaller lump sum.
The financing alleviates the most immediate worries dogging Sprint. But some say it doesn't address the long-term growth challenges, especially its $33.4 billion debt burden. Sprint's $4.25 billion of notes due 2023 still yield more than 12 percent, almost twice as much as when they were issued. The company has also lost 20 percent of its stock-market value over the past year.
"I don't think these moves will get them very far," said Darren Hughes, a money manager at Invesco. "There's just no way they are going to grow" owing so much money.
David Tovar, a Sprint spokesman, says the company will get stronger and win over investors as it raises $11 billion in financing, cuts $2 billion of costs and boosts revenue. Once that happens, "the capital markets will look completely different for Sprint."
With the extra money and spending cuts, Sprint can probably cover $12.9 billion of its cash needs through March, David Hamburger, an analyst at Morgan Stanley, wrote in a note to clients. But the carrier will probably require about $10 billion more to stay solvent for another 12 months after that, he said.
While SoftBank orchestrated the deals and brought in Mizuho Financial Group Inc. for $2 billion of bridge financing, it didn't invest any money itself.
Sprint's shaky finances -- and the fact SoftBank has already sunk $22 billion into the company with little to show for it -- drove the decision, said a former Sprint executive familiar with the deals. Masayoshi Son, chairman of both companies, came up with the plan so SoftBank wouldn't have to put in more money, the person said.
Neither SoftBank nor Son are guaranteeing the sale-leaseback loans, Tovar said. Feeling pressure on its own finances, SoftBank will sell a stake in Alibaba Group Holdings Ltd. as part of a plan to raise cash from asset sales.
Sprint needed the financing because it's been all but shut out of the bond market. About $15.3 billion of Sprint's debt trades at distressed levels and investors demand yields as high as 13.5 percent to buy its bonds. With the sale-leaseback deals, Sprint said the interest rate will be in the "mid-single digits."
To the dismay of some Sprint bondholders, these private deals put the new lenders ahead of everyone else when it comes to any creditor claims because the loans are secured by phone inventory and network assets, according to research firm Covenant Review. That could mean the difference between recouping most of your money or getting pennies on the dollar in the event of a default.
Nonpayment is a big concern. Swaps traders have priced in a 62 percent chance of a default within the next five years. For T-Mobile US, its closest competitor, the odds are just 16 percent.
Any capital in the door helps Sprint, even it if comes at the expense of bondholders, said Sabur Moini, a money manager at Payden & Rygel Investment Counsel, which oversees $100 billion, including Sprint bonds. Prior to the deal, Sprint would have run out of money in 10 months based on its rate of cash burn, data compiled by Bloomberg show.
"They're getting capital relief," he said. "That's a positive for a company that doesn't have access to the markets."
Sprint has also shown signs of life. In 2015, it added more subscribers for the first time in eight years, through promotions like $5-a-month iPhone leases and half-off service plan offers.
Still, some of the carrier's biggest improvements may ultimately be cosmetic, according to Craig Moffett, an analyst at MoffettNathanson.
Based on generally accepted accounting principles, money that Sprint raises from its sale-leaseback deals -- including its phone-rental program -- would typically be netted out of its free cash-flow numbers. But last quarter, Sprint put out an adjusted figure that included "proceeds from the sale-leaseback of devices and sales of receivables, net of repayments," a regulatory filing showed.
In that way, Sprint was able to narrow its free cash-flow deficit to $1.4 billion. Without any of the adjustments, Sprint would have burned through $3.1 billion in the year ended March instead, the filing showed.
Sprint says it's been transparent about the costs and benefits of the sale-leasebacks and the adjusted numbers make them easier to compare with its peers.
Regardless of how Sprint accounts for the transactions, its spending cuts are very real. Sprint has far more 2.5 gigahertz spectrum than any other U.S. carrier, but without significant investments, it can't turn those airwaves into a network that can carry more movie downloads and faster live-TV feeds than its larger rivals.
Sprint points to permit delays and a more thrifty approach to network construction for the slowdown in spending, yet the penny-pinching may cost the company more customers, said Walt Piecyk, an analyst at BTIG.
"If you don't invest in your customers, whether in the network or customer care, you might ultimately lose them," he said.
To Moffett, the unspoken goal might be to hold out long enough so a buyer can take Sprint off SoftBank's hands -- which is quite a comedown from Son's audacious attempt in 2013 to combine Sprint and T-Mobile to challenge Verizon Communications and AT&T.
"It sure looks to me like they are buying time," Moffett said. "Although this time, it's likely as the acquired rather than as the acquirer."