Sprint Corp. (NYSE: S) has recently revealed an unusual funding option that will help pay off its debts. The US telecommunications holding company will sell network equipment amounting to approximately $3 billion to a newly-formed firm, which will pay $2.2 billion for the assets and lease the equipment back to Sprint straightaway. These assets will largely consist of cellular tower equipment.
The newly-formed company is Network LeaseCo and it will be made specially for this deal. The firm is backed by Softbank Group Corp, which is the majority shareholder of Sprint Corp. The American telecommunications company has disclosed that it will repay the lease within 2 years in unequal staggered payments by the month of January in 2018. After the mobile carrier managed to repay the total amount, the assets will return to Sprint.
This means that the US mobile carrier was able to obtain a loan worth $2.2 billion by using its network equipment assets as collateral for this loan. This transaction is anticipated to go through the following week. Moreover, it is expected that Sprint will utilize the lump sum amount to repay parts of its enormous debts.
This transaction will provide the American telecommunications holding firm with access to better financing terms. Sprint will only have to pay a mid-single digit rate for the deal, in comparison to the high-yield US bond rates. Network LeaseCo will also become a part of the accounting books of the mobile carrier, giving it reporting accounting benefits from the depreciation of its network equipment assets.
Aside from that, given the huge massive debt that the company has at the moment, Sprint Corp. may not have other choices of raising capital.
According to the CFO of the telecommunications holding firm Tarek Robviati, “This transaction is an important first step in addressing upcoming debt maturities and allows us to stay focused on our corporate transformation, which involves growing topline revenues and aggressively taking costs out of the business to improve operating cash flows.” Robviati had previously discussed about the ability of Sprint to leverage on its assets before.
The newly-formed Network LeaseCo will also have a higher standing compared to existing bondholders in the event that Sprint Corp. files for bankruptcy. The deal can be considered a part of the American mobile carrier’s greater plan to reduce its debt of $34 billion. According to the JPMorgan technology analyst Philip Cusick, “The transaction is one of many tools that Sprint can use to remain solvent for at least the next two-plus years while it works to stabilize the company and try to return to growth.”
Yet, this is not the first time that the telecommunications holding company has proposed to make a move similar to this. During the early part of the previous year, SoftBank Group Corp. has formed a phone leasing company in order to aid Sprint Corp. in raising $1.2 billion, which only gave the mobile carrier liquidity relief for only a short time. The JPMorgan analyst Cusick said, “We don’t think this is a particularly impressive transaction but see it as one of many tools that Sprint can use to remain solvent for at least the next 2-plus years while it works to stabilize the company and try to return to growth.”