Sprint likely to repay spectrum ABS in event of merger, says Moody's

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If Sprint pairs up with T-Mobile, as it is reportedly considering, the wireless carrier would most likely repay $3.5 billion of notes backed by leases on its spectrum licenses, according to Moody’s Investors Service. So investors would have little to worry about, aside from how to put their money back to work.

In a report published Tuesday, Moody’s noted that repaying the notes, which were issued last year, would require a make-whole premium of 50 basis points over the interest rates on Treasury bonds with the same tenor.

Even if Sprint does not repay the notes, investors might still get their money back sooner than they originally expected. That’s because the indenture governing the securitization contains a prepayment trigger that protects noteholders from deterioration in the credit quality of the notes. Any event that meets the definition of a change in control (as defined in Sprint’s corporate credit agreement) and results in a downgrade of the spectrum ABS would trigger prepayment at 101% of face value.

The notes have a weighted average life of approximately three years and are currently rated triple-B by both Moody's and Fitch.

Whether a change of control is triggered would depend on the structure of the potential merger, however. And it's unclear whether Moody’s would downgrade the spectrum notes in such an event. The rating agency thinks a merger would have a mixed impact on the credit quality of the notes. On one hand, a combined Sprint and T-Mobile would be stronger than Sprint; on the other hand, the spectrum rights backing the ABS would be less crucial to the merged entity than to Sprint alone.

The combined entity could shift network traffic away from the ABS transaction spectrum to other spectrum bands available from T-Mobile, though this would not be easy. It would require a significant reconfiguration of Sprint's network strategy, a considerable amount of time, and a sizable capital outlay, given that the majority
of Sprint's spectrum is high band spectrum and T-Mobile has no high-band spectrum.

Still, early repayment of the notes might be the best outcome in the event of a merger. Should the deal not qualify as a change of control, leaving the notes outstanding, and should the combined entity subsequently default, the combined entity would be more likely to reject the lease in a Chapter 11 bankruptcy than if Sprint were to default.

And the amount investors recover following a lease default by a combined entity would depend on the value of the licenses and of the lease guarantee from certain Sprint subsidiaries.

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