Though credit rating agencies have assigned Sprint Corporation (NYSE:S) a speculative, non-investment-grade, junk rating, the company just issued debt yielding 3.5% - nearly half of its corporate average interest rate of 6.9%.
More than a simple reach for yield, investors flocked to Sprint's latest issuance because it was securitized by the company's spectrum licenses.
Spectrum, and Licenses
Humans generate and broadcast all types of information - radio, television, mobile data, etc. - over radio waves. All this data travels over airwaves without interference by utilizing different frequencies. Broadcasts made on the same frequency generate interference, causing both signals to become distorted.
The Department of Commerce and other governmental organizations worldwide sell licenses for each specific frequency to limit such interference, keeping vital societal services functioning properly.
Why Spectrum Licenses are Inherently Valuable
Several characteristics of spectrum and licenses create durable value:
- Fixed, limited quantity of frequencies:
The radio wave spectrum is limited; we can only broadcast information on a limited range of frequencies, roughly up to 300GHz. Above this frequency, radio waves turn to infrared/visible light waves, and no longer carry the data we want them to.
Each frequency allows for a broadcast on its unique wavelength. Interference limits the use of a single frequency for multiple broadcasts.
- Trends in consumption:
As humans generate and consume more data, the demand on the radio wave spectrum increases. The first radio broadcast could have broadcast on any frequency. As radios proliferated, users had to identify with particular frequencies to communicate with the correct parties and avoid interference. More mobile devices coming online provides similar issues.
Significant to Sprint's Financials - Liquidity Crunch
The above characteristics make Sprint's spectrum licenses very valuable - hence the issuance's 3.5% yield.
The issuance also significantly helps Sprint manage its liquidity and capital constraints.
In the next twelve months (current portion), Sprint has $5.6 billion of maturing debt, financing, and capital leases:
Because Sprint's operating cash flows do not cover its required capital expenditures, the company must turn to financing for solvency.
The $3.5B of debt issuance will help to provide for the company's operations and liquidity over the next 12 months, covering roughly 60% of the company's necessities.
The new debt will also reduce the company's interest expense by roughly $140M on a go-forward basis, as Sprint plans to use the money to pay other maturities.
At 3.5%, the new debt issuance will cost roughly $120M in interest per year:
The only specific debt maturing this year is $300M of 14.75% notes left over from the Clearwire acquisition. Sprint will use the other $3200 to pay down other debt, averaging 6.9% interest, for total interest elimination of $265M of annual interest cost.
Astute Financial Move, but Not Permanent Solution
Sprint just made an astute financial move. It had to take some action to reduce its coming maturities, and it also afforded itself some interest reduction.
However, the company still has many concerns. Due to covenant restrictions, Sprint cannot currently issue any more secured debt. Its unsecured debt would likely fetch market yields significantly north of its current interest rates. While 2017 has less debt maturing than 2016, 2018 and beyond contain significant obligations:
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.