Investors are wondering whether the stock of NII Holdings (NIHD) is going to take off but its bonds may be a safer bet. NII Holdings is the distributor for Nextel in Mexico and Latin America. It also owns cell towers and spectrum.
The stock took a hit recently when management announced that revenues would range from $5.7 billion to $5.9 billion, just shy of the street's guide of $6.1 billion. The company shed 92,000 unprofitable Brazilian customers in the third quarter and reported a $0.48 per share loss. Its expected 2012 capex is around $1.5 billion. Much of this will be used to upgrade systems to 3G.
A great article entitled NII Holdings Looks Very Undervalued shows a sum of the parts approximating $7.4 billion. This includes the following:
Spectrum Assets - $6.3 billion.
Cell phone towers - $2.0 billion.
Other assets - $5.4 billion.
Liabilities - $6.3 billion
Add in its recent announcement of a $750 million offering due 2019 to cash and liabilities.
NII's bonds due August 15, 2016 are yielding over 13%. Part of the reason is that the company has an unusual debt structure--much of its debt is in pari passu. This means that its debt is on par with its other debt in a bankruptcy. Most of the time, the order goes like this: bank loans, senior debt, junior debt, convertibles, and then other payables. According to the company's 10Q from September, its debt load looked like this:
- Senior notes, net $ 2,723,436
- Spectrum financing 643,151
- General financing 410,376
- Capital leases 319,901
- Equipment financing 417,671
- Convertibles 206,480
- Import financing 102,915
- Other 1,937 3,717
- Total debt 4,619,387
- Less: current portion (210,889)
- $ 4,408,498
Though the company derives most of its revenues from Latin America, it is headquartered in Reston, Virginia, so it is under the U.S. legal system.
Bond holders are betting that the company will stay solvent over the next three and a half years. The odds of this are pretty good. In a worst case scenario, the company would have to deteriorate pretty quickly. With all of these nice assets, bond holders are pretty well secured. And 13% is a return that most investors would give their eye teeth for.
The bonds are rated junk at CCC. BBB is the top investment grade rating but we all remember in 2008 how inaccurate the rating agencies were. Investors are better off doing their own research and assigning their own risk, not following the rating agencies. The CUSIP is 67021BAD1.
Disclosure: I am long NIHD.
Additional disclosure: We hold NII Capital bonds.