Sprint straddles uncertain merger outcome with special mandatory redemption and non-call life provisions
Farhin Lilywala, refer to disclaimer on restrictions of use at the bottom of the page.
Sprint today convinced high yield investors to buy into an uncertain future as its pending union with T-Mobile remains under regulatory review, according to five sources following the situation. The company priced a USD 1bn 7.25% guaranteed note due 2028 this afternoon in order to refinance debt coming due in just two months, while it awaits the approvals, the sources said.
The notes, which launched yesterday via lead JPMorgan, priced at 99 for a 7.418% yield, slightly wider versus whispers in the 7% coupon area with a 99 issue price. The indenture includes a special mandatory redemption at par if the merger succeeds, and offers investors a potentially lucrative non-call life structure if the merger doesn’t manifest, the sources added.
While most investors participating in the deal are likely comfortable with the standalone Sprint risk, the bonds could still trade down in the event the merger is blocked, if others punt on the news, the sources said.
Meanwhile, better opportunities can be found in Sprint’s capital structure in the secondary market, one of the sources pointed out. For example, Sprint’s longer-dated USD 2bn 8.75% senior unsecured notes due 2032, which traded today at 112.25 to yield 7.215%, could gain 10-15 points if the merger goes through and yield narrows due to the credit enhancement of the combined company, he said. The notes are non-call for life, so would command a pricey takeout if the company opted to refinance.
“If you think the merger is going through, buy Sprint unsecured bonds. If you don’t think it’s going through, just don’t buy anything,” one of the sources said.
Still, the new notes sit between roughly USD 15bn of secured debt and USD 21bn of unsecured debt, making them attractive for investors on a guarantee-basis at standalone Sprint, three of the sources said.
On the break, the guaranteed notes popped a half-point to trade at 99.5 yielding 7.33%, according to a trader.
The merger with T-Mobile is waiting for approval from a federal judge to rule on an antitrust case brought to court by officials from 13 states and the District of Columbia. Even if the company manages to get the judge’s approval, it still requires the blessing of the California Public Utilities Commission (CPUC). The CPUC has until July to vote, but can also extend that timeline further.
Sprint is levered 4.6x, based on USD 37.4bn of total debt and USD 8.14bn of LTM EBITDA. Factoring USD 3.18bn of cash, net leverage totals 4.2x.
Its 2020 debt maturities include USD 1bn 7% guaranteed notes due March 2020, followed by USD 1.5bn 7% senior unsecured notes due in August 2020. Sprint also has nearly USD 4.8bn of notes due in 2021.
Sprint’s USD 2.475bn 6.875% senior unsecured notes due 2028 – also non-call life – last traded today at 102 to yield 6.57%, down from trades at 105 last week.
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