Sprint ends Q3 with $5 billion liquidity, touts revolver deal, will have to tap credit markets

By Paul Deckelman

New York, Oct. 26 - Sprint Nextel Corp. ended the third quarter with $5 billion of liquidity - and the No. 3 U.S. wireless operator announced on Wednesday that it had augmented its position with an expanded and amended revolving credit facility.

"We are very pleased with the vote of confidence from our bank group in providing us with this amendment, and the increase in our revolver," the Overland Park, Kan.-based telecom company's chief financial officer, Joseph J. Euteneuer, declared on a conference call with analysts following the release of results for the quarter ended Sept. 30.

Euteneuer said that the $2.1 billion credit facility it entered into in May of 2010 had been expanded by $150 million, bringing the total amount up to $2.24 billion, and modifications had been made in the covenant governing Sprint's ratio of debt to OIBDA - operating income before depreciation and amortization, the company's key earnings measure - to permit Sprint to add back in its calculations of certain equipment net subsidy costs relating to the company's introduction of the Apple iPhone to its customers.

He said that the amendment provides an exclusion of net subsidy costs up to $2.7 billion over the next six quarters. The revolver is scheduled to mature in October 2013.

With the company not yet able to predict what the total volume of its iPhone business would be - and thus, the amount it must spend on it - the CFO said that the bankers had given Sprint "total flexibility to get through 2012 and the first quarter of 2013."

$5 billion of liquidity

Euteneuer said that at the end of the quarter, the company's liquidity position stood at roughly $5 billion - some $4 billion of cash, cash equivalents and short-term investments, plus undrawn revolver availability of about $1 billion.

At the end of the quarter, the company's balance sheet showed $16.272 billion of long-term debt, financing and capital lease obligations, versus $16.278 billion at the end of the second quarter on June 30, $18.535 billion at the end of 2010, and $18.54 billion a year ago, at the end of the 2010 third quarter.

The CFO said that Sprint's nearest debt maturity is $2.25 billion of loan maturities due in March 2012; after that, he said, come $300 million of note maturities in May 2013, followed by a $1.5 billion maturity in the fourth quarter of 2013.

Funding shortfall ahead

Last December, Sprint Nextel announced that it would roll out "Network Vision," which it described as "a cutting-edge network evolution plan" aimed at consolidating existing multiple network technologies into one, seamless network in order to deliver enhanced voice quality and data speeds for customers across the U.S., working with major-league telecom technology suppliers Alcatel-Lucent, Ericsson and Samsung.

The ambitious plan is very capital-intensive, as is Sprint's plunge into iPhone technology. On the conference call, Euteneuer said that next year, for instance, Sprint anticipates costs related to Network Vision and iPhone to impact its cash position by some $5.5 billion, only partially offset by the $1.1 billion of benefits it expects to generate from them.

The cash drain is expected to continue through 2013; only in 2014 are Network Vision's benefits to the company expected to exceed costs, and that won't happen for iPhone until 2015.

The company expects to still be generating cash flow from its core operations to partially offset those costs, but also has debt maturities coming due.

The bottom line, the CFO said, is that the company projects a peak cash shortfall in 2013 of between $3.2 billion and $5 billion, and overall financing needs over the next several years ranging between $5 billion and $7 billion.

Euteneuer said Sprint Nextel expects to refinance its $4 billion of upcoming debt maturities through October 2013 via the public debt markets. It will meantime raise incremental vendor financing in the area of between $1 billion to $3 billion to cover a portion of its Network Vision costs.

He told an analyst that "we feel very good about the conversations to date" with the vendors on that proposed incremental financing.

"We've had good talks to date and we'll see where that goes."

Clearing up the Clearwire mess

Euteneuer and chief executive officer Daniel R. Hesse each took pains during the call to address market concerns arising out of statements the company made during an investor presentation on Oct. 7 which appeared to call into question Sprint's ongoing relationship with its majority-owned Clearwire Corp. affiliate, a partner in its network.

Market perceptions that Sprint might be cutting Clearwire loose in developing its new network caused the bonds and shares of both companies to slide badly for several days after that.

Euteneuer formally apologized for "not having provided enough information and clarity" during the Oct. 7 presentation, adding that in retrospect, "there were things we could have done to better address market concerns."

Hesse meantime explained that when Sprint was talking at that time about using its own spectrum resources to go ahead with its network development through 2014, such projections assumed the continuation of existing agreements with Clearwire."

He said Sprint was continuing to work with the Kirkland, Wash.-based telecom company - in fact, he announced on the call the signing of a nonbinding cooperation agreement between the two companies to work together on the technical specifications of the Clearwire LTE network, "and to ensure a superb customer experience for Sprint customers on the Clearwire LTE network."

He said that Sprint is making "very good progress, we believe, on the technical front with Clearwire - and I'll leave it at that."

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