Sprint eyes paying off some debt as bond rating falls deeper into junk range

Sprint’s $32 billion debt load – roughly equal to one year’s revenues – is getting lots of attention these days.

Standard & Poor’s Corp. cut its rating on Sprint’s bonds further on Tuesday. Already in junk-bond territory, the rating fell to B, down from B+. The rating agency said its decision reflects “intense competition” in the cell phone industry and pressures on Sprint’s cash supplies.

The downgrade comes despite recent customer additions at Sprint and some stronger financial reports.

Standard & Poor’s noted those improvements but said “Sprint will be challenged to profitably grow its subscriber base and reverse negative (cash flow) trends” given the competition it faces.

Even before the downgrade, prices of Sprint bonds, which trade much like its stock, had tumbled hard during a downdraft in the high-yield, or junk, bond market.

Sprint bonds due to pay off in March and September of 2023 were selling at about 68 cents for each dollar that Sprint will owe on those maturity dates, according to bond prices available online through the Financial Industry Regulatory Authority.

And there’s little chance Sprint would raise money by issuing more bonds at the interest rates investors currently would expect it to pay. Chief financial officer Tarek Robbiati said so last month during a session with industry analysts in Las Vegas.

Sprint declined to comment for this article, but a spokeswoman referred to the recent conference call management had with analysts when the Overland Park company announced its earnings.

The talk was about paying off some of the bonds that make up the company’s debt pile.

Robbiati told analysts that debt reduction is one goal behind Sprint’s push to cut spending by $2.5 billion a year. These are expected to be permanent spending reductions, freeing up that much in revenues each year to go to other needs such as debt repayment.

“Yes, that’s the intent,” Robbiati said during the call with analysts.

But there is more than cost cutting in play. Sprint said it will need to spend about $1 billion – in severance to laid off workers and other kinds of one-time costs – to permanently cut spending by $2.5 billion.

And it needs fresh cash to finance its network upgrade, called Next Generation. Sprint said it will generate between $3 billion and $5 billion in cash through a new network lease financing deal. The deal will work somewhat like a similar deal in December that involved cell phones and netted Sprint $1.1 billion in cash.

“The intent is that with the cash flow that we would be generating from cost reductions on one side, and our ability to raise capital through Network Lease Co. on the other, we would be able to repay all of the maturities that fall due during fiscal year (20)16,” Robbiati said during the call.

Sprint’s latest report to investors shows $3.675 billion in debt comes due in that time.

The alternative to paying off that debt would be to refinance it by issuing new bonds to replace the ones coming due. This would be prohibitively expensive at the current interest rates investors demand.

Analyst Jim Patterson offered another reason Sprint needs to be paying off some of is debts. Interest on all those existing bonds and loans add up to more than $2 billion a year, he said in a post on RCRWireless News.

“Sprint has to get their debt costs under control and rolling (over) the debt that is due soon is not an option,” Patterson said.

This story was originally published February 3, 2016 at 5:56 PM with the headline "Sprint eyes paying off some debt as bond rating falls deeper into junk range."