T-Mobile's Tie-Up With Sprint Would Make Junk-Bond Behemoth

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(Bloomberg) -- The merger of T-Mobile US Inc. and Sprint Corp. would create the largest U.S. junk-bond borrower, as the companies seek to compete with the top two players in the country’s telecom industry.

The combination of the number three and four U.S. wireless carriers will have total debt of as much as $77 billion, according to a joint company presentation Sunday. T-Mobile’s debt ratings are already on review for downgrade from both Moody’s Investors Service and S&P Global Ratings as Sprint’s debt load will boost leverage. Having access to a larger asset base and improved liquidity profile will help Sprint, which may get upgraded to a stronger speculative-grade rating.

Moody’s sees leverage, defined as debt to Ebitda, peaking at 4.9 times one year after the transaction, before dropping to below a ratio of 4.

“Leverage of that nature isn’t necessarily bad, but it’s a lot higher than where T-Mobile is right now,” said Dave Novosel, an analyst at Gimme Credit. While the company will have joint debt of up to $77 billion, that’s somewhat offset by expectations for $23 billion in earnings before interest, tax, depreciation and amortization, Novosel said. “When you measure it that way, it’s not that scary.”

The new company, which will operate as T-Mobile, expects to achieve an unsecured debt rating somewhere around BB, while its secured debt will rank in the low BBB range, according to the presentation.

It’s hard to say if the deleveraging targets are realistic, said Gene Tannuzzo, a portfolio manager at Columbia Threadneedle Investments, which manages $494 billion in assets. Still, the commitment is encouraging, he said.

“The good news is, compared to other transactions, it’s not a leveraged transaction in and of itself,” Tannuzzo said. The companies will enjoy some benefits from combining and cutting costs, he said.

The companies already have $38 billion of committed debt financing supported by a $4 billion revolving credit facility, the presentation said. Barclays Plc, Credit Suisse AG, Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley and Royal Bank of Canada are providing T-Mobile with the funds.

Representatives for Bellevue, Washington-based T-Mobile and Overland Park, Kansas-based Sprint didn’t immediately respond to requests for comment.

Cost Savings

T-Mobile is looking to acquire Sprint in a $26.5 billion all-stock deal that aims to challenge the two biggest providers, Verizon Communications Inc. and AT&T Inc. The two smaller companies say the deal can generate $43 billion in cost savings, even as they roll-out of a faster fifth-generation network sooner than previously planned, expand their customer care centers and retail locations, and create a larger combined U.S. payroll.

Under T-Mobile’s ownership, Sprint would benefit from lower investment costs, reduced leverage and a more extensive asset base, Moody’s said in a report Sunday, placing Sprint’s ratings on review for upgrade. Sprint has a company rating of B2, five steps below investment grade, and a secured debt rating of Ba2. T-Mobile’s unsecured rating would likely fall one notch to Ba3 given Sprint’s significant amount of secured debt that would rank higher in the capital structure, Moody’s said in a separate report.

Sprint’s bonds rallied in early trading Monday on the likelihood of an upgrade, only to pare the gains on concern that the takeover will get rejected by antitrust enforcers. Its stock fell as much as 15 percent. T-Mobile’s shares fell as much as 8.1 percent.

‘Big Players’

Sprint and T-Mobile have long struggled to generate excess free cash flow given the demanding capital costs to run a wireless network, which has taken a toll on leverage and ratings. The new joint company aims to achieve net debt of 1.8 times Ebitda in the long-term, defined as beyond the next three to four years. Net debt is forecast to fall to $50 billion to $52 billion in that time, according to the presentation.

Even though Sprint will likely have investment-grade secured debt ratings after the acquisition, its unsecured bonds and those of T-Mobile will still dominate junk-bond indexes, according to Bloomberg Intelligence analyst Stephen Flynn.

“They’ve been big players for a long time and will still be the largest high-yield credit out there,” Flynn said. The new company will likely look to issue more secured debt in the future, aiming for a capital structure similar to that of Charter Communications Inc., which carries investment-grade ratings for about three-fourths of its debt, with the remainder in high yield, Flynn said.

©2018 Bloomberg L.P.

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