Sprint Corp. is borrowing against its most valuable asset – the airwaves – to buy more time for a turnaround.
Just as some companies sell their building to investors who then lease it back to them, the wireless carrier is entering into a sale and lease back transaction for a portfolio of spectrum licenses granted by the U.S. government. Rather than selling the spectrum licenses (and third-party lease agreements) directly to investors, however, it is contributing them to three special purpose vehicles that will lease the collateral back to Sprint under a “hell or high water” lease, which has extremely limited termination rights.
These SPVs will issue bonds backed by the leases as well as a senior guarantee from Sprint and some of its subsidiaries. The initial offering, launched Wednesday, is for $3.5 billion. But Sprint can potentially raise as much as $7 billion through the transaction, which is structured as a master trust.
That will provide Sprint, which is running an operating deficit and has several billion dollars of unsecured debt maturing this year alone, with enough capital to fund operations over the next several quarters and delay issuing new high-yield bonds.
The transaction provides the single-B rated company with financing at much lower interest rates than it could with unsecured debt. The three tranches of asset-backed securities have provisional low investment grade ratings of Baa2 from Moody’s and BBB from Fitch. They mature in September 2021, 2023 and 2026.
In its presale report, Fitch said the spectrum-backed notes are “a critical piece to begin addressing Sprint’s maturity wall in fiscal years 2016 and 2017.” Sprint has nearly $9 billion of high yield bonds maturing over the next three years, including $3.6 billion, $1.9 billion and $3.1 billion in fiscal years 2016, 2017 and 2018, respectively.
Moody’s noted that the carrier still has the option to raise up to $9 billion of secured bank debt, which could be another new pool of capital that is independent of the high-yield bond market, albeit a more expensive one.
However, the sale of some of Sprint’s most valuable assets to a non-recourse entity and guarantee of the lease payments comes at the expense of Sprint's existing creditors. As the spectrum financing debt grows to its maximum of $7 billion, it could affect the rating of Sprint’s junior instruments, in particular the single-B rated junior guaranteed notes, according to both Moody's and Fitch. The ratings of Sprint’s triple-C-rated senior unsecured notes will not be impacted by the spectrum debt, however.
As with a handset finance securitization completed by Verizon this summer, Sprit’s spectrum lease deal blurs the line between corporate bonds and asset-backed securities. For one thing, the ratings “uplift” is limited because performance of spectrum-backed notes more closely linked to performance of the sponsor than other kinds of securitization. Many asset-backeds sponsored by below investment grade companies achieve top investment grade ratings, given sufficient credit enhancement. But both Moody’s and Fitch limit the uplift in this deal to four notches. That means, should Sprint’s corporate credit rating be downgraded, the spectrum-backed notes could be downgraded as well.
The ratings agencies do take comfort from the fact that the spectrum leases are strategically important to Sprint. The carrier would likely affirm them in a bankruptcy. The portfolio includes licenses of spectrum in the 2.5 GHz band and the 1.9 GHz band, comprising about 14% of its total spectrum holdings.
There’s also an 18-month liquidity facility that can be used to fund interest payments should lease payments be disrupted during a Sprint bankruptcy or reorganization.
Finally, should it be necessary for the SPVs to sell the spectrum licenses, the rating agencies expect that proceeds would be sufficient to repay all outstanding debt; even if the licenses were sold as significantly stressed recovery levels, proceeds would still allow a high level of recovery on the notes.
Another reason that the transaction blurs the lines between corporate debt and securitization; Sprint will consolidate the spectrum debt in its financials and Moody’s will include the debt and interest costs in Sprint’s adjusted credit metrics. The operating lease between Sprint and the SPE will be eliminated in consolidation and will not require any adjustment to Sprint's reported metrics.
By comparison, most securitizations remove assets from a sponsor’s balance sheet and the debt remains off balance sheet as well. (Though impending risk retention requirements will compel sponsors to keep a 5% economic interest in most deals.)