Sprint Corp. is borrowing another $4 billion against its most valuable asset: the airwaves.
On Monday, it launched an offering of $3.94 billion of bonds backed by payments on a portfolio of spectrum licenses granted by the U.S. government. In order to lower its funding costs, the single-B-rated company in 2016 contributed the licenses to three special-purpose vehicles and leases them back.
Since there are already $3.1 billion in principal outstanding on the 2016-1 bonds, the program has now reached its original available capacity of $7 billion.
The new issuance consists of two senior note tranches of seven-year and 10-year bonds, which will be backed by lease-payment obligations from Sprint Communications to three special-purpose Sprint entities that own the spectrum through a true-sale agreement with the parent corporation.
The wireless carrier uses the long-term (30-year) lease buyback as a means to avoid having to take out additional higher-cost unsecured debt after it implemented cost-reduction plans to deleverage itself and reverse its longstanding negative cash flow. The 30-year spectrum lease agreement is of the “hell or high water” long-term variety, with limited termination rights, and is guaranteed on a senior unsecured basis by Sprint and its subsidiaries.
The notes have strong recovery potential, according to Moody's Investors Service and Fitch Ratings. The present value of the lease payments “significantly exceeds” the nearly $4 billion balance of the notes, meaning a “relatively low 50% recovery” of the guarantee claim would be enough to repay the Class A notes in full, Moody’s stated. Fitch added that recoveries were more than 91% in most default scenarios covered by Fitch.
The 2018-1 issue has preliminary low-investment-grade ratings of Baa2 rating from Moody’s Investors Service and BBB from Fitch Ratings, the same as the 2016-1 issuance.
The spectrum lease-backed bonds, like those issued two years ago, are a critical piece to address Sprint’s “substantial” maturity wall of unsecured debt over the next four years.
In 2018 and 2019, Sprint will have $9 billion in unsecured debt coming due, and $3.4 billion from 2020 to 2022. Unless Sprint is able to improve “long-term cash generation" and position itself to reduce debt, it will “materially increase” the odds that the company will develop an unsustainable capital structure, according to Fitch Ratings.
But the company’s position has improved since the first round of spectrum-backed bonds were sold.
The 2016-1 issue was to raise proceeds giving Sprint revenue for some operational breathing room and to delay any high-yield bond issuance at the time. This time, the spectrum-backed issuance follows on the heels of Sprint’s $1 billion issue of new unsecured notes due 2026 (rated B3 by Moody’s), which helped “preserve Sprint’s secured debt capacity as dry powder for any potential deterioration in credit market conditions,” according to Moody’s.
Also last September, Sprint Communications added $3.2 billion in unsecured financing capacity through a new revolver facility that carried a junior position guarantee and is pari passu with existing guaranteed subordinate notes held by Sprint.