This article is part of a Real Money series on 20 distressed companies investors should consider adding to their distressed watch list.
Sprint (S) is being crushed under the weight of its own high-yield debt.
Its shares plummeted Wednesday, falling 13% by midday trading, further exacerbating a prolonged tailspin. The reason is shareholders and lenders are fleeing what looks like an unsustainable leverage mess.
In short, the telecom giant is learning the price of high-yield bonds, or those Moody's and Standard & Poor's rate below "BBB-" or "Baa3," respectively.
And now CEO Marcelo Claure has reportedly been scrambling to pull out all the stops, most recently in an attempt to save $1 billion by leasing government-owned tower space instead of its current broadcast infrastructure providers Crown Castle (CCI) and American Tower (AMT).
But it appears his efforts are too little, too late, because leverage is simply too high, and it appears nobody wants a piece of the telecom carrier's debt (or equity for that matter) if Sprint cannot produce a more stable cash flow.
The Deal: Sprint is slowing to a crawl
Just look at where its debt is trading at in the secondary markets: Sprint's $1.5 billion unsecured bonds, maturing 2020 with a 7% annual interest rate, were quoted at $0.69 on the dollar today, down from $0.93 on the dollar in November, according to pricing data compiled by Bloomberg. The bonds are rated "Caa1" and "B+" by Moody's and S&P.
This helps explain why, in Wednesday morning trading, shares of Sprint are down 46% over the past four months, followed by declines of 15% and 2% at T-Mobile (TMUS) and Verizon, and a 4% gain at AT&T (T).
Moody's downgraded Sprint's corporate rating in September to B3, citing its high debt-to-earnings ratio and its decreasing liquidity pool, which included $1.9 billion in cash as of September, down from $4 billion in March, based on its quarterly filings with the SEC.
"Sprint's B3 CFR reflects the company's highly leveraged capital structure, intense competitive challenges, a deteriorating liquidity position, our projection for substantial negative free cash flow through at least 2017 and Sprint's need for significant additional capital to fund its network buildout and to refinance upcoming sizable maturities," Moody's analysts wrote in the report.
For more on Real Money's 20 distressed companies to watch: