Can Sprint Find Enough Change Between the Seat Cushions to Survive?

Inside A Sprint Corp. Store Ahead Of Earnings Figures
A customer talks on a cell phone while exiting a Sprint Corp. store in Woodhaven, Michigan, U.S., on Thursday, Oct. 29, 2015. Sprint Corp. is scheduled to release earnings figures on November 3. Photographer: Laura McDermott/Bloomberg via Getty Images
Photograph by Bloomberg via Getty Images

Despite heading the fourth-largest mobile carrier in the country, Sprint CEO Marcelo Claure lately looks more like a man gunning for awards at one of Wall Street’s financial engineering conventions.

This week, Claure unveiled a sale and leaseback arrangement covering some $3 billion worth of cellular networking equipment owned by his cash-strapped, over-leveraged company. That followed a $1.3 billion deal of securitized phone leasing receivables in November and precedes upcoming transactions to monetize some of Sprint’s tens of billions of dollars worth of airwave licenses. In each of the deals, Sprint (S) gets additional cash in the short term but also adds to its immense debt load.

“They’re just buying time, kicking the can down the road,” says Walter Piecyk, an analyst at BTIG in New York, who’s bearish on the company’s prospects. “It doesn’t improve the fundamentals and at some point that runs out.”

Claure has been trying to pull Sprint out of its tailspin and improve the fundamentals, as well, with mixed results so far. Cheaper monthly plans and buzzy television ads filled with chainsaw-wielding customers cutting their bills literally in half have led to some recent subscriber gains. But Sprint isn’t growing as quickly as arch rival T-Mobile and Claure’s efforts to cut expenses to offset the discounted plans haven’t gone far enough to eliminate continuing losses. And a few childish twitter spats with T-Mobile CEO John Legere probably didn’t do much for his image with customers or investors.

For more on the Sprint-T-Mobile Twitter feud, watch:

That’s not to say the financial deals aren’t savvy. Sprint needs to raise more than $4 billion just to cover its projected free cash flow deficit this year. At the same time, the company’s corporate bonds trade at yields as high as 13%. Taking into account the costs and benefits of the more convoluted financing structures, Sprint says it is paying only “mid-single digit” rates for the additional cash.

Sprint desperately needs the cash as it has been losing money for the past decade and, despite rampant cost cutting, remains in a negative free cash flow position. Staggering under more than $30 billion of total debt, Sprint also faces the oncoming challenge of refinancing $9 billion that comes due in the next three years, according to credit agency Fitch Ratings.

In the latest deal, Sprint set up a separate vehicle, called Network LeaseCo, to buy some of its network assets, mostly electronic gear hanging off cell towers. LeaseCo then borrowed money using the assets as collateral from lenders including Sprint majority owner SoftBank. On the $3 billion of assets, LeaseCo will pay Sprint $2.2 billion of cash over the next few years. The November phone receivables deal generated $1.1 billion of cash and Sprint plans to repeat the process every quarter as customers lease more phones.

Up next is a transaction to transfer valuable airwave spectrum licenses and raise cash in a similar manner. Again, Sprint would still have use of the licenses, probably through some form of lease payments. But the transaction also likely creates the risk that lenders could seize the licenses if Sprint couldn’t make its payments.

Sprint spokesman David Tovar confirmed that a spectrum-related financing is in the works but would not say when the deal would be announced. “We are working on what that might look like,” he said.

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In general, credit analysts have praised the moves, saying they have given the company additional breathing room.

“These financing structures will result in an increase with overall debt particularly as Sprint monetizes network related assets, which could be viewed negatively,” Bill Densmore, senior director at Fitch, wrote about the strategy. “However, Sprint greatly benefits from the cost effective access to substantial liquidity with the financing structures that are expected to be repeatable.”

Investors and stock analysts who follow the company haven’t been as impressed. Sprint shares slipped 3% in the two days since the network equipment deal was announced and have lost a total of 29% over the past year. Meanwhile, competitors AT&T and Verizon are among the top-performing stocks of the year and T-Mobile has seized the title of most competitive challenger after exceeding Sprint in subscriber size last year.

“Sprint remains under a great deal of pressure to execute on its turnaround strategy,” Deutsche Bank analyst Matthew Niknam noted on Thursday. “Sprint still faces an uphill battle, with turnaround execution increasingly critical.”

“The key question in our mind remains whether the financing of its assets provide it with enough of a runway to create a sufficient and sustainable exit velocity,” Barclays analyst Amir Rozwadowski said in his report.

In the fourth quarter, revenue declined 10% to $8.1 billion but the company’s net loss decreased by almost two-thirds to $836 million thanks to Claure’s hefty cost cutting efforts. And Sprint added 366,000 of the most valuable regular monthly subscribers (known as “postpaid subscribers” in industry jargon), its second consecutive quarter of net gains.

Analysts fear that the subscriber gains may revert to losses this year, but Sprint says Claure’s strategy is working. “We are in the midst of a multi-year turnaround plan and we’ve been making some good progress,” says spokesman Tovar.

With all of Claure’s financial dealmaking, at least investors will get a chance to find out if that progress will save the company in the end.

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