Potential Sprint Nextel exchange targeting Nextel bonds gains traction, Goldman analyst says

By Paul A. Harris

St. Louis, March 18 - Recent trading prices of Nextel Communications' legacy high-yield bonds imply that an exchange offer from Sprint Nextel Corp. targeting the Nextel bonds would be favorably received, according to market sources.

The Nextel bonds are up about 10 points in the past week-and-a-half, according to a buyside source, who spoke on background late Wednesday afternoon.

Scott Marchakitus, CFA, an analyst with Goldman Sachs & Co., laid out the exchange scenario in a report published last week.

Such a deal would likely target Nextel's 6 7/8% notes due 2013, its 5.95% notes due 2014 and its 7 3/8% notes due 2015, all rated Ba2 by Moody's Investors Service and BB by Standard & Poor's, Marchakitus said.

Big discount to Sprint paper

The Nextel bonds have long suffered a huge discount to the Sprint bonds because of the guarantee structure of the Nextel paper, the analyst recounted.

"There is a possibility that Sprint Nextel could revoke the guarantee on the Nextel bonds, and as a result the high-yield investment community has treated the Nextel bonds sort of like orphans for a long time," he added.

The Nextel bonds due 2013 and 2014 ended Tuesday around 55 bid, while the 2015 paper was 52½ bid.

The hypothetical exchange deal that Marchakitus lays out has the 2013 paper being called out at 69, the 2014 bonds at 68 and the 2015 bonds at 65.

What's more important, the analyst added, is that in exchange for locking in the discounts to par, bondholders would likely be swapped into paper that enjoys the same guarantee as Sprint bonds, or even a superior guarantee at the level of the operating company.

Uncertainty about guarantee

Nextel bondholders' worries about whether or not Sprint Nextel guarantees the legacy paper ramped up last fall when a buzz spread in the market that Sprint might unload Nextel's underperforming iDEN network, the buysider source recounted.

Company officials subsequently reiterated their commitment to the iDEN network.

However concerns regarding the Nextel bond guarantee linger.

"People believe that if Sprint tried to sell the iDEN network, and transfer the debt with the assets sale, there would be lawsuits against Sprint, asserting that the Nextel bonds should be guaranteed by Sprint already," the source added.

"But clearly [the Nextel legacy bonds] don't trade that way in the market.

"The Nextel 2013 trades at 55 cents on the dollar. The Sprint 2012 trades at 83 cents on the dollar.

"There is huge discrepancy in yield."

Therefore, the buysider said, the idea that Nextel bondholders might look favorably upon being exchanged into paper that is guaranteed by Sprint Nextel, at substantial premiums to existing Nextel bond prices, is entirely plausible.

The likelihood that any new paper would come with longer maturities would not necessarily impede such an exchange, the buysider said.

Amendment required

Sprint Nextel has the ability, under a new credit agreement put in place late last year, to issue up to $3 billion of new debt. However, to take out the Nextel bonds the company would have to successfully negotiate an amendment to its existing credit facility, according to Marchakitus.

Hence the time frame for an exchange would likely be the second half of 2009, he added.

However reverse inquiry in an exchange deal like the one set forth in the Goldman Sachs report cannot be ruled out, according to the buyside source.

Reverse inquiry from Nextel bondholders expressing an eagerness to participate in such an exchange could move up the timing.

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