Sprint is a communications company offering wireless and wireline services for US customers.
It has 45 million retail clients and more than 57 million. It has recently become the fourth largest player in the US market after losing the third position to T-Mobile. The company was acquired in July 2013 by Softbank, the Japanese telecom giant run and controlled by Masayoshi Son, which now owns over 80 per cent of the company’s shares.
Notwithstanding the ongoing support of its know-how-rich shareholder, the company has been struggling to improve its position within the very competitive US wireless sector.
The company started experiencing net losses of postpaid handset subscribers in mid-2013 (when it reported over one million net subscriber losses for a single quarter) which prompted it to introduce new service plans with more advantageous conditions for clients.
Subsequently, there was noted an improvement in the pace of subscribers dropdowns and, more recently, a shift to net additions. Nevertheless, this relative improvement came at the cost of lower average revenue per user as Sprint has been increasingly relying on adding tablets/connected devices (for which subscription rates are lower).
Another factor that put pressure on revenues despite an improvement in client base was the new practice of leasing devices.
The leasing program (introduced in September 2014) does not require a signed fixed-term service contract, provides for service plans at lower monthly rates compared to traditional subsidy plans and allows qualified subscribers to lease a handset and make payments for the handset over the life of the lease.
At the end of the lease term, the subscriber can turn in the handset, continue leasing the handset or purchase the handset.
This in turn also meant that Sprint had to incur higher working capital investments as the suppliers of the leased handsets have to be paid in around 30 days, whereas the lease installments are received over time (generally 24 months); on top of that, one has to account for the residual value of the handset which implies that securitising receivables to pay vendors is not an option and prompted the search for alternative vehicles.
These developments, together with the ongoing net losses reported by the company, its high leverage and the rapid fall in cash over the last few quarters have taken a toll on investors’ sentiment as worries mount that the turnaround story might come too slow or too late, increasing the risks around its ability to refinance its debt.
More recently, the company came under the spotlight after Moody’s unexpectedly downgraded it by two notches to B3 (equivalent to B-) and the unsecured bonds to Caa1 (equivalent to CCC+).
Overall, it looks like the longer term fortunes of Sprint depend to a large extent on (i) its ability to find and implement innovative technology solutions so as to allow it to close the service quality gap with its larger competitors without adding to its indebtedness, (ii) streamlining its operations and (iii) reducing working capital investments which in turn would mean lower cash outflows.
Management is convinced that it can deliver on the first item given the know-how of its shareholder, while on the last two fronts there were some positive headlines with management recently disclosing that it is looking to cut operational costs by $2-2.5 billion (equivalent to over 10 per cent of operating costs excluding depreciation and amortisation).
As regards the problem of unsustainable cash burn, Sprint is working with its shareholder and financial partners on a leasing arrangement that will reduce its working capital investments but details are still pending. Speculations are mounting that these will be released once the latest quarterly results become available (2nd November).
Having outlined the longer term challenges, I am of the opinion that the upward shift in the Sprint yield curve (drop in prices) in the aftermath of the Moody’s downgrade might have unduly penalised the shorter end of the curve.
More specifically, I find the 9.125 per cent Sprint 2017 attractive given the recent correction and the liquidity headroom that the company has. To this end, I mention that the company had $6.6 billion available liquidity at the end of June 2015 (out of which $2.3 billion in cash and equivalents) and to this it could add a new leasing facility.
What is more, the leverage covenants leave room for further debt issuance, including in the form of secured debt. Meanwhile, during FY16-17 it has debt maturities of $4.6 billion, out of which (only) two billion come due before the 9.125 per cent notes.
Disclaimer: This article was issued by Raluca Filip, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.