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Mayank Marwah
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Sprint Collateralizes Spectrum to Lower Debt

Company's debt is more than double its market value

March 04, 2016 | About:

Sprint (NYSE:S) has been working for years now to get back on track after being in the red for eight long years. The company is burdened under a huge debt of more than $34 billion. Sprint has been trying to turn things in its favor, but the road hasn’t been smooth. Masayoshi Son-owned SoftBank purchased a majority stake in Sprint in 2013 with the hope of reviving its business.

Sprint attempted to acquire T-Mobile (NASDAQ:TMUS) but faced objections from the regulators. The company introduced attractive plans to draw customers from rival networks and has been effective in doing so but not to the extent it expected. Sprint's chairman, Son, now proposes to form a SoftBank subsidiary that will provide Sprint loans against its spectrum so the latter uses the same to pay off its massive debt.

A closer look

Sprint’s debt size of more than $34 billion is more than twice its market value. Sprint’s CFO Tarek Robbiati said the plan is to create a SoftBank subsidiary that would finance Sprint by around $3 billion to $5 billion through collateralizing its airwaves. The subsidiary so formed would use Sprint’s wireless equipment. Spectrum is the lifeline for any telecom carrier. Analyst Dave Novosel of Gimme Credit said, “Spectrum is one of the most valuable assets they have. … It gives them something to be measured on since Sprint can’t be measured on cash flow.”

Sprint’s spectrum is valued more than $115 billion. It is the most spectrum-rich carrier in the U.S., thanks to the Clearwire (CLWR) acquisition. Evidently the Kansas carrier doesn’t want to dispose or give away ownership of its most priced asset, particularly at a time when all national carriers are fighting for more spectrum. SoftBank’s latest move is similar to its strategy of creating a handset leasing company last year to fund leased devices for Sprint so that the carrier’s liquidity is not crunched. Sprint generated $1.3 billion by selling leased devices to the unit and secured finance for $1.2 billion.

Sprint recently reported fourth-quarter earnings that surpassed Wall Street estimates. This was led by the company’s aggressive marketing and promotional campaign introduced last fall. The wireless operator has been working to cut down on network expenses to improve liquidity and control its humongous debt accumulated over the years.

Controlling high debt

Sprint needs to repay debt of around $10 billion by the end of this decade and $2.3 billion this year. Using airwaves as collateral is not a very popular move, however, and Sprint is running out of other options that could help it fix its debt level and improve its liquidity. Last October the company declared a cost-cutting measure of $2.5 billion that was quite effective in boosting its cash position.

The company possesses the largest mass of 2.5 GHz spectrum, which it plans to use in place of fiber for offering wireless backhaul for cells. The carrier is in the process of working toward its network vision of deploying LTE network to compete with its larger rivals. For years, Sprint has been committing to developing a network infrastructure to build the fastest wireless network in America. Huge investments and high debt level has been a challenge. Sprint is working to catch up with Verizon (NYSE:VZ), AT&T (NYSE:T) and T-Mobile. But before that, the company needs to lower its debt level, deploy its LTE network and widen coverage.

Last word

Sprint has the most essential ingredient for success in the telecom space – i.e., a huge mass of spectrum in the low band to offer reliable service. It enjoys the funding and support of the deep-pocketed SoftBank and plenty of airwaves in the high band. However, Sprint is not able to capitalize on its assets the way it should. The Nextel shutdown resulting in poor and irregular network, loss of customers, accumulated losses and a huge pile of debt have plagued the company's progress.

Sprint is overleveraged; however, its high valued large mass of spectrum gives it the option to sell it partially for lowering debt, if required, and still have enough of it.

About the author:

Mayank Marwah
A seasoned writer with keen interest in the automotive, technology, telecommunication, retail and aerospace sectors.

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