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Sprint merger reduces bankruptcy risk for spectrum ABS, Moody's says

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Sprint’s planned merger with T-Mobile should reduce the likelihood of a default on $7 billion of notes backed by leases on its spectrum licenses, according to Moody’s Investors Service.

This view is largely based on the expectation that combined companies would be rated Ba2, which is three notches higher than Sprint’s current B2 rating (though it is under review for an upgrade). The bonds, which were issued in 2016 and 2018, are backed by payments from Sprint’s “hell-or-high-water” lease of a portfolio of spectrum licenses in the 2.5 GHz and 1.9 GHz bands. The merger agreement contemplates T-Mobile and T-Mobile US offering unsecured guarantees on the performance of the lease, as well.

And while leases can be repudiated in a bankruptcy, Moody’s believes that T-Mobile would likely view the securitized spectrum licenses as critical, just as Sprint currently does, and so would likely continue to make payments in the event of a reorganization. In a report published Wednesday, the rating agency noted that Sprint has about 204 MHz of spectrum (based on a nationwide population weighted average), while T-Mobile has 110 MHz.

In the first few years after the merger, Sprint’s existing customer base would face significant negative effects if the company lost its ability to use this spectrum, which would make it likely that SCI would affirm the lease under a Chapter 11 bankruptcy, the report states. But even in a bankruptcy that occurs after an integration of the carriers' networks and customer bases, the leases would likely be affirmed, since spectrum licenses backing the bonds likely would be very important to the combined carrier’s 5G network.

The license are particularly the 2.5 GHz spectrum, whose value in 5G networks has been recently proven in foreign markets, according to Moody’s. “Currently, the US lags other industrialized countries in its transition to 5G technology, whose increased speed and network capacity will allow for the creation of future technologies in areas such as self-driving vehicles and “Internet of Things” devices,” the report states.

However, in the unlikely event that the spectrum lease was rejected in a bankruptcy or liquidation, the merger, as proposed, would likely have a small negative effect on the size of recovery available.

That’s because the combined carriers would have more total debt, and the new debt will primarily be secured. “This would reduce the funds available to cover any deficiency claim on the lease after the sale of the spectrum collateral, a claim that we expect to be relatively small based on the most likely value of the collateral in a distressed sale,” the report states.

The specific level of recovery on the deficiency claim would depend upon whether the new credit facility and term loan B at T-Mobile would be considered replacements for similar outstanding debt at Sprint that is pari passu with the lease. The negative effect on the potential size of a recovery on a deficiency claim would be more significant if the liquidation value of the spectrum collateral was unexpectedly low in a distressed scenario.

Overall, however, the proposed deal is a net plus. The negative effect on the potential size of a recovery in the mostly likely scenarios would be less significant for the spectrum bonds than the positive effects of the lower probability of default on the lease.

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