Saturday, 20 October 2018

UPDATE 2-Sprint's bonds drop after T-Mobile merger talks ended

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Junk bonds issued by US wireless carrier Sprint dropped several points on Monday after the company and rival T-Mobile said over the weekend that they have ended merger talks.

The combination would have created a mobile operator with more than 130m US subscribers, and could have helped Sprint try to get out from under its US$38bn debt load.

Sprint has been struggling to invest in its network and has resorted to heavy discounting to grow its subscriber base.

Analysts have been worried that without a merger, the company may be left without the scale needed to invest in a highly competitive market.

“SoftBank and Sprint had likely been looking to a merger with T-Mobile as a quicker way to boost Sprint’s inferior network,” CreditSights analysts wrote in a note on Monday.

“With ever increasing maturities between now and 2024, Sprint will have to carefully balance network investments with debt service.”

Sprint’s 6.875% 2028s - the company’s most heavily traded notes on Monday - dropped as much as 6.5 points in early trading and were last down 5.125 points at 103.375 to yield 6.4%, according to MarketAxess data.

Other heavily traded Sprint bonds were between 3 and 5 points lower, with many hovering close to their lowest levels of the year. T-Mobile’s bonds were little changed.


Sprint shares were down more than 10%, while T-Mobile’s stock was down around 6%.

Sprint has made a lot of progress but it has the more levered balance sheet and it would have benefited more from a credit perspective,” said Greg Zappin, a portfolio manager at Penn Mutual Asset Management.

The two companies said in a joint statement on Saturday that they have called off merger talks after failing to find “mutually agreeable terms”. nL2N1NA0F4

With the merger off the table, Sprint will now have to rely on its own forces to continue on its turnaround plan.

SoftBank Chairman Masayoshi Son guided investors to expect an increase in capital expenditure for Sprint to US$5bn-$6bn annually in the medium term, up from US$3.5bn-4bn for the current fiscal year.

But some analysts have already started to get nervous.

“We remain skeptical that a relatively small incremental spend will be enough to improve Sprint service enough to catch up,” JP Morgan analysts wrote in a note on Monday in which they cut their target price on Sprint’s stock.

They said Sprint plans to fund this additional spending by selling more debt backed its wireless spectrum - a funding strategy that the company used in 2016 to achieve lower funding costs than available in the US junk bond market. nL1N1CQ2ID

Sprint (B2/B/B+) is the largest US issuer of junk bonds, with around US$24.3bn outstanding as of the end of October, according to Bank of America Merrill Lynch.

Cost cuts and other operational improvements over the past year, combined with the strong performance of the US high-yield market, have created more favorable conditions for Sprint to access the debt markets.

“The markets are open for Sprint now,” said Zappin. “But I don’t think they have a gun to their head.”


Sprint bonds drop after T-Mobile merger talks ended

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