Fixed-income investors are taking a more optimistic view of Sprint Nextel Corp. than the stock market, with bondholders looking past a fourth-quarter loss and taking comfort from an increase in subscribers.
The third-largest U.S. wireless carrier’s $2 billion of 8.75 percent notes due March 2032 jumped 2.9 cents to 86.9 cents on the dollar to yield 10.3 percent yesterday, the highest price since Oct. 25, according to Trace. Other debt issues from the Overland Park, Kansas-based company also rose, even as its stock slid 1.6 percent to $2.41 a share.
Sprint sold 1.8 million Apple Inc. iPhones in the fourth quarter, with 40 percent to new customers. It was the first period of sales for a device that the carrier is betting on to lure users and help it rebound from five unprofitable years. The cost of subsidizing the smartphone added to a net loss of $1.3 billion, or 43 cents a share, while revenue jumped 5.1 percent to $8.72 billion.
“It seemed equity was focusing on the headline net loss number while the bondholders liked the longer-term effect of the increased subscriber numbers,” Adrian Helfert, a Boulder, Colorado-based senior vice president at Smith Breeden Associates, which oversees $6.2 billion, wrote in an e-mail. “Bondholders were breathing a small sigh of relief in not seeing some of the more negative estimations come to fruition.
Scott Sloat, a Sprint spokesman, declined to comment on the stock and bond market activity in an e-mail.
Sprint said in an earnings statement yesterday that it now serves more than 55 million customers, the most ever, after adding a net 1.6 million subscribers in the fourth quarter.
The average monthly bill for contract users, excluding prepaid numbers, climbed to $58.59, compared with an average of $58.11 estimated by six analysts surveyed by Bloomberg.
Sprint and competitors, including the larger AT&T Inc. and Verizon Communications Inc., sell the iPhone from Cupertino, California-based Apple at a loss to attract contract customers that generate higher average revenue per user, or ARPU.
The smartphone led an increase in subsidy expenses to about $1.7 billion from about $1.2 billion a year earlier. Sprint said it pays more to support iPhones than it does for other devices.
The ARPU increase, up more than $3 from a year earlier, was a good sign for bond investors, said John Fruit, a money manager at Nuveen Asset Management in Minneapolis, where he oversees $600 million in high-yield assets including Sprint bonds.
“The reaction was a sigh of relief that results were not worse than feared as revenue was generally in line with expectations,” he wrote in an e-mail.
‘Financials Are Weak’
As for stock investors, the amount of subsidies and iPhones sold may be an indication that Sprint’s profit will take more time to improve.
“The financials are weak due to the amount of money they are sending to Cupertino,” James Ratcliffe, an analyst at Barclays Capital, said before the report. “This year and next are going to be unattractive financially. I think people who own Sprint might be looking more toward the prospects in 2014.”
Analysts predicted a loss of 38 cents for the fourth- quarter and sales of $8.7 billion, according to the average of estimates compiled by Bloomberg.
The quarterly loss widened from $929 million, or 31 cents, a year earlier, the carrier said in the statement yesterday.
The net loss data “may have caused the initial sell-off” in the stock, Fruit said.
Sprint shares fell as much as 7.4 percent to $2.27 yesterday after the results before closing at $2.41. While the company’s bonds rose to the highest since October, the stock failed to reach its closing price of $2.57 at the end of that month.
The carrier’s $2.48 billion of 6.875 percent notes due in November 2028 gained 1.75 cents to 76.25 cents on the dollar with a yield of 9.8 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Sprint’s $1.73 billion of 6.9 percent debt due in May 2019 gained 1.69 cents to 87.75 cents on the dollar with a yield of 9.3 percent, the data show. Both were the highest since October.
Sprint is a high-yield borrower, graded B1 with a “negative” outlook by Moody’s Investors Service and B+ also with a “negative” outlook from Standard & Poor’s, Bloomberg data show. That means it pays higher interest costs than AT&T and Verizon, which are investment-grade.
The company has $19 billion of outstanding bonds, none of which mature this year, Bloomberg data show. Long-term debt including lease obligations, was $20.3 billion on Dec. 31, according to a regulatory filing yesterday.
The average yield on Sprint’s debt fell to 8.63 percent yesterday from 8.77 percent on Feb. 7, according to Bank of America Merrill Lynch index data. That’s still above the 7.85 percent on all speculative-grade telecommunication debt, the index data show.
UBS AG predicted Sprint would sell 1.9 million iPhones. Verizon Wireless, the biggest U.S. wireless carrier, sold 4.3 million iPhones last quarter and AT&T activated 7.6 million of the devices.
Sprint added 161,000 contract subscribers, compared with the 211,000 average analyst estimate. The monthly defection rate, or churn, of contract customers was 1.98 percent. Analysts predicted 1.89 percent.
Last month, Sprint said it would combine its business and consumer divisions into one operation. Eight top management positions consolidated into four as a result, and the company said four executives are leaving.
Sprint said it would boost its capital spending to about $6 billion this year. To compete with AT&T and Verizon, Sprint is building a higher-speed network using the same technology the larger rivals have. It has also agreed to work with billionaire Philip Falcone’s wireless-network venture LightSquared Inc.
Last week, Sprint extended a deadline it had given LightSquared to gain regulatory approval for its service, a condition of the companies’ agreement, until mid-March. Under the deal, Sprint would build and operate LightSquared’s so- called fourth-generation network during an 11-year period in exchange for $9 billion and $4.5 billion in service credits.
LightSquared is awaiting clearance from the Federal Communications Commission as regulators weigh test results that show the service’s signals disrupt global-positioning system equipment used by cars, tractors, boats and planes.
“The fourth quarter came in OK,” said Scott Dinsdale, a bond analyst with Montpelier, Vermont-based KDP Investment Advisors Inc. “We’re seeing some modest growth, not great but it’s growth nonetheless. It gives people a little more comfort that everything trending in the right direction at least on the operations side,” he said.
“Sprint noteholders have been beaten up for a long time, and finally we are seeing the value of our collateral on this asset getting better,” Dinsdale said.