(Bloomberg) — Sprint Corp. bondholders have long bet that the wireless company’s acquisition by T-Mobile US Inc. will be allowed to go through, but by at least one measure, they’re growing more worried about the deal’s potential to get done.
The cost to protect Sprint’s debt against default for five years has nearly doubled since September to around 333 basis points, according to ICE Data Services. Credit traders have been digesting court testimony from a takeover challenge brought by Democratic attorneys general. The attorneys, who hail from 13 states and the District of Columbia, say the merger could lead to higher prices and poorer service for consumers. Closing arguments in the case are scheduled for Wednesday.
A victory for Sprint could be a boon to bondholders, potentially sending risk premiums on the debt tumbling as much as 200 basis points, Bloomberg Intelligence analyst Stephen Flynn wrote in a note. But if the deal falls apart, the consequences for Sprint could be dire. Flynn said in a separate note Tuesday that Sprint could face ratings downgrades and require a liquidity injection from backer SoftBank Group Corp. To some investors, the debt still looks too risky to buy.
“What we try to look at is, ‘Are we being compensated for the risks?’” said John McClain, a portfolio manager at Diamond Hill Capital Management, which doesn’t own Sprint debt. “With Sprint, you absolutely are not.”
A spokeswoman for Sprint declined to comment.
Analysts are split on the potential outcome of the case. Cowen & Co. analyst Paul Gallant put the odds of a ruling favoring the states at 60% in a note earlier this month, while LightShed Partners’ Walt Piecyk sees a higher likelihood of a decision tipped toward the companies. The spread between T-Mobile’s offer price for Sprint and the trading price rose to around $3.29 a share on Tuesday from a low of 53 cents in May 2018. The higher the gap, the more uncertain the market is of a deal happening.
Either outcome would have broad implications for the $1.3 trillion U.S. junk-bond market. With more than $35 billion of long-term debt outstanding, Sprint is the second-largest issuer of speculative-grade notes, according to data compiled by Bloomberg. T-Mobile is seeking a split debt structure for the combined company, with about 55% of the obligations carrying investment-grade ratings.
Sprint, which carries single B range ratings from the three major credit ratings companies, has seen its debt surge since it agreed to combine with higher-rated T-Mobile. Its 7.785% bonds due in 2023 change hands for more than 108 cents on the dollar, up from a low of around 60 cents in early 2016.
If the deal fails to close, Sprint will be left to contend with some $25 billion of debt that matures in the next five years, according to Bloomberg Intelligence. Flynn said in a note that SoftBank may need to invest $3 billion to $5 billion to help the wireless company deal with its upcoming maturities.
“If it doesn’t go through, Sprint is on its own,” said Dave Novosel, a senior bond analyst at Gimme Credit. “At some point over the next year or two years, Sprint is going to need to consider coming to market to refinance some of that debt, which could pressure the market on the whole.
–With assistance from Scott Moritz.
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