Sprint’s 9.25% Debentures Due 2022 Likely Include More Restrictive Limitations on Secured Debt Incurrences Than Sprint’s Other Notes

Relevant Item:
Sprint Debt Documents

As noted in previous coverage, Reorg Covenants’ prior analysis of Sprint Corp.’s (“Sprint”) debt documents excluded a review of Sprint Communications’ (“SCI”) 9.25% debentures due 2022 (the “9.25% Notes”), as the documents governing such notes were not publicly available on SEC’s EDGAR. However, we were recently able to obtain certain debt documents related to SCI’s 9.25% Notes. As such, this article will revisit certain secured debt capacity estimates previously discussed and then analyze the company’s secured debt capacity, given constraints under the debt documents governing its 9.25% Notes.

For reference, Sprint’s capital structure as of June 30 is illustrated below. Note that there is only about $200 million in aggregate principal amount of 9.25% Notes outstanding in relation to the company’s approximate $36 billion of total debt outstanding.
 
Note that this analysis excludes a review of Clearwire’s 2016 Secured Notes, sale-leasebacks, capital leases, equipment financings and the Export Development Canada (“EDC”) financings, as previously discussed. Defined terms used herein and not otherwise defined have the meanings given to such terms in prior coverage.

Covenant Conclusions
 

• As previously discussed, SCI’s bank debt likely substantially limits the company’s ability to incur secured debt, but SCI’s Notes (excluding its 9.25% Notes) may permit it to incur about $6.8 billion of secured debt.
   
• SCI’s 9.25% Notes, which were issued under an indenture and supplements dated from 1986 through 1990, may permit SCI to incur only about $3.7 billion of new-money debt secured by liens, given the company’s current capitalization.
   
• The limited secured debt capacity under the 9.25% Notes, coupled with the fact that there is only about $200 million in aggregate principal amount of such notes outstanding, suggests that the company could repurchase or redeem these notes should it seek to incur secured debt in excess of such limits.

Revisiting Secured Debt Capacity Under SCI’s Bank Debt and Certain Notes

SCI’s Revolver and Bridge Facility

SCI’s Revolver and Bridge Facility have similar debt and lien covenants, as previously discussed, subject to certain exceptions. While each includes a subsidiary debt covenant, at least $6 billion of debt with subordinated subsidiary guarantees may be permitted under the Subordinated Guarantee Basket, and about $720 million of additional subsidiary debt may be permitted under a Relevant Debt Basket, as previously discussed. Additionally, as discussed in Part II of our prior two-part series on Sprint, the liens covenants under the Revolver and Bridge Facility likely substantially restrict the amount of secured debt SCI and its subsidiaries may incur (however, the debt and liens covenants likely do not limit the company’s ability to pursue sale-leaseback transactions).​

Sprint, SCI and SCC Notes

As mentioned in Part I of our previous series, most of the company’s notes, whether issued by Sprint, SCI or SCC, include covenant packages that are similar to those in an investment-grade issuance. They generally include covenants restricting the sale of substantially all of each issuer’s assets and liens covenants. However, the Guaranteed SCI Notes do include debt and anti-layering covenants, and Clearwire’s 8.25% Exchangeable Notes due 2040 do not include a liens covenant.

On the basis of Sprint’s first-quarter financial figures, as discussed in August, generally, the SCI Notes (which, as noted, excluded the 9.25% Notes for discussion purposes) and Sprint Notes likely permit at least $6.8 billion of secured debt issued by SCI, and the Sprint Notes may permit as much as $9.5 billion of secured debt (in addition to any secured debt that may be permitted under certain Capital Expenditure Baskets). Additionally, while the SCC Notes likely restrict certain debt incurred by SCC, they likely permit secured debt to the same extent permitted under the SCI Notes and Sprint Notes.

Secured Debt Capacity Under the 9.25% Notes

SCI’s 9.25% Notes are governed by an Indenture, dated as of March 1, 1983, between United Telecommunications Inc. and Irving Trust Co., as Trustee, as modified by the First Supplemental Indenture, dated as of April 1, 1986, and Second Supplemental Indenture, dated as of May 1, 1990 (together, the “9.25% Indenture,” and we assume that there have been no further modifications to the 9.25% Indenture). The 9.25% Indenture includes debt and lien covenants restricting the “Company,” or United Telecommunications Inc., subject to exceptions. For purposes of this analysis, we assume that United Telecommunications Inc. subsequently became Sprint Corp., which then became Sprint Nextel Corporation, which in turn became Sprint Communications Inc., and each of these subsequent entities assumed the obligations under the 9.25% Indenture - as such, we will assume that “Company” refers to SCI. Note that the 9.25% Indenture includes a covenant permitting mergers and consolidations of the Company, subject to certain conditions. Nevertheless, Sprint’s latest 10-K includes a subsidiary named United Telecommunications Inc.

Debt and lien covenants and notable exceptions are illustrated and discussed further in the chart below.
 
An estimate of SCI’s Consolidated Capitalization is illustrated below. Note that we use the company’s total debt as a proxy for SCI’s consolidated debt (according to Sprint’s consolidated balance sheet, there may be an intercompany loan between Sprint and SCI that is back to back with Sprint’s third-party debt). We also use Sprint’s consolidated equity and deferred tax figures as a proxy for SCI’s consolidated equity and deferred tax figures for these calculations.
 
As discussed under the General Analysis row in the “Debt and Liens” chart above, the debt covenant under the 9.25% Notes generally restricts the company from incurring senior debt but permits senior debt in an amount up to 65% of Consolidated Capitalization. This likely permits SCI to incur about $26 billion of additional senior debt, given the company’s current capitalization of $70 billion and its outstanding $36.6 billion of debt. Meanwhile, the liens covenant restricts liens on the property of the Company but permits debt secured by liens in an amount not to exceed 5% of Consolidated Capitalization. This likely permits SCI to incur about $3.7 billion of new-money debt secured by liens, given the company’s current capitalization. Nevertheless, note that it may be possible for the company to incur incremental unsecured debt in order to boost capacity under the 5% Consolidated Capitalization liens basket.

While the 9.25% Notes permit a substantial amount of debt and liens, the permitted amount of debt secured by liens is less than the amounts permitted under the Sprint Notes, SCI Notes and SCC Notes discussed above (assuming no manipulation of the Consolidated Capitalization figure by further incurrences of unsecured debt). This limited secured debt capacity, taken together with the fact that there are only $200 million of 9.25% Notes outstanding, suggests that the company could repurchase or redeem the 9.25% Notes should it seek to incur secured debt in excess of such limits. Nevertheless, the company’s bank debt likely continues to restrict any secured debt incurrences but could potentially be amended given that each facility is undrawn.

Conclusion

As previously discussed, SCI’s bank debt likely limits the company’s ability to incur secured debt, and SCI’s Notes (excluding its 9.25% Notes) may permit it to incur about $6.8 billion of secured debt, but SCI’s 9.25% Notes may permit SCI to incur only about $3.7 billion of new-money debt secured by liens, given the company’s current capitalization. The limited secured debt capacity under the 9.25% Notes, coupled with the fact that there is only about $200 million in aggregate principal amount of such notes outstanding, suggests that the company could repurchase or redeem these notes if such restrictions would impede a secured financing.