Stressed Out: Sprint's Owner Plans to Buy Network out of High-Yield Debt Mess

 | Feb 17, 2016 | 9:30 AM EST
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This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.

Every investor who's held Sprint (S) over the past couple of years carries some level of remorse -- but few, if any, have been burned as badly as Masayoshi Son.

The Japanese billionaire and CEO of telecom giant Softbank (SFTBF), who purchased in 2013 a $22 billion controlling position in Sprint, is now scrambling to turn things around through a massive buyback of Softbank shares.

To many on Wall Street, the maneuver appears to be a last resort after about 23% of Softbank's market cap dissolved over the past 12 months, primarily the result of Son's more than 83% stake in Sprint.

"I think that for many of you may feel that the SoftBank is having a headache with Sprint and having a suffering situation," Son said on Softbank's February earnings call. "And many of you may concern and worried about us, and I believe that has been reflected to the share price of SoftBank in many ways."

As Real Money reported, Sprint is tied up in high-yield debt and has been spewing its liquidity -- the crucial on-hand resources needed to service a $34 billion debt pile-- at a steady clip ($2.2 billion cash reported in the third quarter is down 41% year-over-year).

Now Son, who watched Sprint slide below T-Mobile (TMUS) to the bottom of the big four U.S. carriers, which include Verizon (VZ) and AT&T (T), has also seen his more than $9 billion Sprint stake dwindle 23% this year alone.

But many investors seem encouraged in his renewed buyback effort, which has lifted Softbank 23% on Japanese exchanges since the Monday roll-out. And the initiative has so far proven successful on two major fronts.

On the one hand, Son has gotten his money's worth. After announcing Monday that 14% of Softbank's outstanding market cap will be repurchased, or roughly 500 billion yen ($4.4 billion), shares of Softbank have climbed by the equivalent of nearly $12 billion.

And the other chief advantage in Son's plan is that Softbank is realizing its first major share-price turnaround in more than a year, with gains of 30% since Friday. 

But the question still looms as to whether Son can get Sprint itself out of its dire high-yield mess. Not only have shares entered a tailspin, down 47% over the past 12 months, but lenders are also ridding themselves of the telecom's paper. (Sprint's nearly $2.3 billion of high-yield "bonds, rated seven notches below investment grade due 2022, which pay out 6% annual interest, traded down at just $0.65 on the dollar Wednesday, and are down 26% over the past six months.)

Son is nonetheless still confident, declaring "Sprint is going to be the rising star of SoftBank" on Softbank's February call with investors. And he attributed much of Sprint's distress to concerns over whether the company can meaningfully cut costs and start to turn a profit.

"That's half of the market I believe, and the remaining half is concerned about the cash of Sprint," he said. "They have a bond redemption end of this year and the end of next year that they will be having a maturity due of the bond redemption."

Son said there will be adequate liquidity reserves to service any debt maturities and is confident that Sprint's network, especially in terms of download delivery speed, will be the key to a lasting turnaround. 

"So, especially in the United States, speed is very slow for the smartphones," he said. "They always see those waiting signs, and you cannot get connection. So that those are the cases that you often see. But now, Sprint is constantly showing the number one position."

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: Sprint Is Collapsing Under the Weight of Its High-Yield Debt

Stressed Out: 3-D Printing and Semiconductors Are Getting Slammed

Stressed Out: Why the Big Steelmakers Are Tanking Today

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