Bloomberg News

Sprint Bond Sale Brushes Bank Lenders Aside: Corporate Finance

September 06, 2013

Sprint Bond Sale Brushes Bank Lenders Aside

Sprint’s willingness to sacrifice its borrowing capacity including a $3 billion unsecured revolving credit line arranged by Citigroup Inc. and JPMorgan Chase & Co. underscores the security provided by Softbank, a company with a $78 billion market value, three times the size of the U.S. unit. Photographer: David Paul Morris/Bloomberg

The bond market is helping to make Sprint Corp. (S:US)’s promises to its bank lenders irrelevant.

The third-largest U.S. wireless carrier, backed by new majority owner Softbank Corp. (9984), said in a regulatory filing yesterday its $6.5 billion bond sale on Sept. 4 was enough to violate the terms of its loans “by a significant level” at the end of the month. While Sprint is in talks with lenders to amend the leverage covenant, the company also said it has the money to pay off its loans and cancel $4.5 billion of credit facilities if it fails to reach an agreement.

Sprint’s willingness to sacrifice its borrowing capacity including a $3 billion unsecured revolving credit line arranged by Citigroup Inc. and JPMorgan Chase & Co. underscores the security provided by Softbank, a company with a $78 billion market value, three times the size of the U.S. unit. That enabled Sprint to complete the biggest junk-bond offering (S:US) since 2008 at lower relative yields than it paid a year ago and also increases the chance it will get the covenant amendment, according to KDP Investment Advisors Inc.

“A year ago I would’ve said it was dicey,” said Scott Dinsdale, an analyst at Montpelier, Vermont-based KDP. “Now they’ve gotten their white knight, they’ve gotten equity infusions already and there’s real financial backing that there wasn’t before.”

Tighter Spreads

Sprint issued $4.25 billion of 7.875 percent 10-year bonds that paid 498 basis points, or 4.98 percentage points, more than similar-maturity Treasuries and $2.25 billion of 7.25 percent securities due in 2021 at 466 basis points over benchmarks, according to data compiled by Bloomberg. Both spreads are narrower than a year ago, when the carrier paid 568 basis points more than Treasuries to borrow $1.5 billion for eight years.

The 10-year notes traded at 101.5 cents on the dollar to yield 7.66 percent, or 476 basis points more than Treasuries, at 9:50 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The offering allows Sprint to “lower the interest rate dramatically” by refinancing higher-coupon debt of Clearwire Corp., the mobile broadband unit that Sprint bought full control of in July, according to Chief Financial Officer Joseph Euteneuer. Clearwire’s $4.4 billion (CLWR:US) of bonds have an average coupon of 11.65 percent, Bloomberg data show.

“That’s real cash savings, and one of the big motivators” to borrow beyond the $4 billion minimum that Sprint had set the day of its sale, Euteneuer said in a Sept. 4 telephone interview.

The new bonds, rated B1 by Moody’s Investors Service and BB-, one level higher, at Standard & Poor’s, also may spark a default on its quarterly leverage compliance test, according to the filing. Junk, or high-yield, high-risk bonds, are rated less than Baa3 at Moody’s and BBB- by S&P.

‘Sufficient Cash’

“We fully expect to get the required waivers and anticipate having sufficient cash on hand to repay and terminate the facilitates if we do not, so there is not an unacceptable risk to cross default,” Scott Sloat, a spokesman for Sprint, said in a e-mailed statement.

Investor demand helped lift the offering size by $2.5 billion, the same amount of debt that Sprint would need to eliminate by Sept. 30 to avoid breaching the limit of obligations relative to adjusted cash flow allowed by the revolver, an Export Development Canada loan agreement and a secured equipment credit facility.

The opportunity to “lock up so much money for such a long term at good rates, to me, it more than outweighed any difficulty in re-negotiating with their banks,” Margie Patel, a money manager at Wells Fargo & Co. in Boston, said in a telephone interview. “I don’t think it’ll be a problem.”

Softbank Purchase

The company had about $1.9 billion of borrowings outstanding linked to those loans on June 30, including $913 million letters of credit under the revolver, when its leverage ratio was 4.2, according to an Aug. 5 regulatory filing. The gauge can’t exceed 6.25.

“It’s the first I can remember that a major company issued debt and then said, ‘Oh by the way, we may breach our loan covenants,’” Dave Novosel, a senior analyst at independent researcher Gimme Credit LLC in Chicago, said in a telephone interview. Sprint should be able to amend the covenant because of its “implicit guarantee from Softbank.”

Billionaire Masayoshi Son’s broadband company paid $16.6 billion to Sprint shareholders and injected $5 billion of new capital into the target for an almost 80 percent stake (S:US). Sprint shares have gained (S:US) 16.9 percent this year, giving the company a market value of $25.4 billion.

“This is a completely different company than it was a year ago,” KDP’s Dinsdale said. “The banks will probably be willing to give these guys a little bit more leash now that they’ve got the Softbank financial backing.”

Beating Verizon

Sprint also may have been motivated to tap the bond market before Verizon Communications Inc. (VZ:US) begins to issue as much as $50 billion of notes to help finance its $130 billion purchase of Vodafone Group Plc’s 45 percent stake in Verizon Wireless, Dinsdale said. Those securities may “swamp the market” and reduce liquidity for other issuers in the telecommunications industry, he said.

In a negotiation between bank lenders and Sprint to amend the leverage covenant, the mobile-phone provider has the upper hand, according to Ping Zhao, an analyst at bond researcher CreditSights Inc. in New York. Creditors wouldn’t want to spoil a relationship that may include future underwriting business, Sprint is in a much stronger financial position (S:US) from the Softbank transaction, and it has enough cash to pay off the loans, she said.

“Sprint is in the driver’s seat,” Zhao said in a telephone interview. “I think they’re going to get a waiver.”

To contact the reporters on this story: Charles Mead in New York at cmead11@bloomberg.net; Matt Robinson in New York at mrobinson55@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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