Analysts: Sprint could continue risky financial strategy with spectrum, real estate lease-backs

Sprint's announcement that it will use its network gear as collateral to borrow $2.2 billion from "external investors" including its parent SoftBank closely mirrors its strategy of establishing a handset leasing company to take costs off its balance sheet and provide more liquidity. And analysts say other similar deals are likely in the works.

The beleaguered carrier sold $1.3 billion in leased device assets in November to Mobile Leasing Solutions (MLS), which was established by SoftBank and other investors. Sprint received $1.2 billion in total financing in return. Similarly, Sprint said late Wednesday it will raise roughly $2.2 billion by selling some of its cell-tower equipment to a new entity to borrow $2.2 billion, paying the loan back "in staggered, unequal payments" over the next two years.

Sprint is likely to double down on the strategy by using spectrum and perhaps other assets as collateral to pay off billions in loans that will come due later this year and in 2017. But that strategy only heightens Sprint's perilous financial position.

"We still expect more tranches to be announced which would bring the total capital infusion from this initiative to be in the $3B - $5B (range)," wrote Jennifer M. Fritzsche of Wells Fargo Securities in a research note. "Disclosed in the announcement was that the assets included in this first sale lease-back were primarily existing equipment located on towers. Put simply, we expect there may be more to come in the future now that the company has established a precedent for the first tranche."

Sprint's spectrum assets are estimated to be worth more than $115 billion, which continues to provide tremendous leverage. And the nation's fourth-largest carrier could also offer up additional network gear and real estate to gin up funds to cover its debts.

"In our view, we believe Sprint will seek to execute additional tranches over the coming quarters," analysts at Barclays wrote. "As highlighted in our recent in-depth review of the carrier, management outlined expectations for $3-$5B in Network LeaseCo proceeds for the calendar year. Moreover, the company fully intends to utilize a mix of network assets to securitize financing -- i.e. existing radio access equipment, spectrum, and new densification network assets. While we recognize its choice to only include existing network assets under its first tranche, we wouldn't be surprised if subsequent tranches were more heavily weighted to the latter two options (spectrum, and new densification network assets)."

The looming question, of course, is when Sprint can return to profitability. The operator reported 501,000 postpaid net adds during a solid fourth quarter, but still posted a net loss of $836 million.

"We continue to expect Sprint to burn meaningful cash operationally in (calendar year 2016), and believe adding more maturities to an already heavy maturity period exacerbates the risk to equity holders," analysts at Jeffries wrote. Sprint has roughly $3.7 billion in maturities due this fiscal year, according to Jeffries, "with an additional $13 billion due later in CY17, and now $2.2 billion for this maturity in FY17. In our view, absent hopes of a near-term operational turnaround, investors would be rewarded for avoiding investment in Sprint shares."

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