Sprint ended Q1 with $8.8 billion liquidity, touts impact of $2 billion junk deal

By Paul Deckelman

New York, April 25 - Sprint Nextel Corp. improved its liquidity position to $8.8 billion at the end of the first quarter, citing the impact of a $2 billion junk bond deal that the Number-3 U.S. wireless operator did during the quarter.

Its president and chief executive officer, Daniel R. Hesse, told analysts during the Overland Park, Kan.-based telecommunications company's conference call Wednesday following the release of numbers for the quarter ended March 31 that its cash, cash equivalents and short-term investments of $7.6 billion at the end of that period are "adequate to address our short-term needs," which include considerable capital spending as Sprint pursues its ambitious Network Vision upgrade.

Sprint's cash position improved sequentially, from $5.6 billion at the end of the 2011 fourth quarter and fiscal year on Dec. 31, 2011 and $4 billion at the end of the third quarter on Sept. 30, 2011.

Sprint's chief financial officer, Joseph J. Euteneuer, said on the call that the company ended the first quarter with a total liquidity position of $8.8 billion; besides the cash, Sprint also had $1.2 billion of undrawn borrowing capacity under its revolving credit facility.

That compares favorably with $6.7 billion of liquidity, including $1.1 billion of revolver availability, at the end of the fourth quarter, and $5 billion of liquidity, including $1 billion of revolver capacity, at the end of the third quarter.

February bond deal pays off

Euteneuer noted that during the latest quarter, Sprint augmented its financial position by raising $2 billion in the junk bond market. It sold $1 billion of 7% junior guaranty unsecured notes due 2020 and $1 billion of 9 1/8% senior unsecured notes due 2017 via a two-part quick-to-market deal on Feb. 27, with both tranches pricing at par.

Proceeds were slated for general corporate purposes, possibly including redemptions or service requirements of outstanding debt, network expansion and modernization and potential funding of Clearwire Corp. The Kirkland, Wash.-based high-speed broadband provider, roughly 50%-owned by Sprint, is the latter's partner in its network buildout.

The bond deal increased Sprint's overall level of long-term debt to $22.26 billion at the end of the quarter from $20.26 billion at the end of the fourth quarter.

Sprint's closest debt maturities are $300 million of 2.672% first-lien senior secured floating-rate notes due May 1, 2013 that Sprint assumed when it acquired former affiliate iPCS Inc. in 2009 and after that, $1.5 billion of 6 7/8% senior serial redeemable notes due on Oct. 31, 2013 that Sprint assumed in 2005 when original issuer Nextel Communications Inc. merged with the company then-known as Sprint Corp. to form the present Sprint Nextel entity.

The CFO pointed out that the two-part bond deal was oversubscribed by potential investors. He also noted that "the price of the guaranteed notes was roughly 200 basis points better than comparable notes issued during the fourth quarter."

On Nov. 4, 2011, Sprint came to market with a quickly shopped $4 billion two-part junk offering that was massively upsized from the originally anticipated $2.5 billion to $3 billion range. It priced $3 billion of 9% junior guaranteed notes due 2018 at par, upsized from the originally contemplated range of $2 billion to $2.5 billion, and also came to market with $1 billion of non-guaranteed 11½% notes due 2021, which priced at par after the tranche was doubled in size from an original $500 million.

Euteneuer said of the February bond deal that "this vote of confidence from debtholders enhanced our liquidity position and strengthens our belief in our ability to raise capital to support our investment in Network Vision and other high-return projects."

Vendor funding talks continue

Network Vision is described by Sprint 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.

On prior conference calls, Euteneuer and Hesse have said that the company plans to raise between $5 billion and $7 billion to cover anticipated cash shortfalls between now and 2015 as it invests heavily in the capital-intensive development plan.

Sprint also expects to keep incurring high costs as it subsidizes the purchase by its customers of Apple Corp.'s hot new iPhone; Sprint - like its larger competitors AT&T Mobility and Verizon Wireless - use free or low-cost iPhones as a lure to get customers to sign up for its regularly billed post-paid service, the company's most lucrative product.

Part of the funding for the Network Vision rollout will come in the form of several billion dollars of incremental vendor financing from the three telecommunications equipment manufacturers working with Sprint on the project, Alcatel-Lucent, Ericsson and Samsung. Sprint previously said that it expects to have such an agreement in place before the end of the current second quarter.

On Wednesday's call, Euteneuer declared that Sprint "continue[s] to pursue vendor financing in the range of $1 billion to $3 billion and our discussions are going well."

Wider loss but more customers

The CFO said that free cash flow for the first quarter was $138 million, versus $257 million in the fourth quarter and $178 million in the first quarter of 2011.

He cautioned that "going forward, we expect that free cash flow will be negative, as investments in Network Vision accelerate and inventory increases as a result of new LTE [4G advanced high-speed wireless] handset launches."

For the quarter, Sprint showed a net loss of $863 million, or 29 cents per share, versus year-earlier red ink of $439 million, or 15 cents per share, with the wider loss attributed to the drop in value of its obsolete Nextel IDEN network, which Sprint is in the process of winding down, moving its remaining customers over to the more modern Sprint network.

But the quarter loss was lower than the roughly 40 to 42 cents per share that Wall Street was looking for.

Revenue of $8.73 billion was up 5% from a year ago and beat estimates of around $8.7 billion.

Sprint also touted its success in adding new customers, with 263,000 post-paid net additions on the Sprint platform, the eighth consecutive quarter of post-paid subscriber growth.

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