This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.
Sprint's (S) struggle to disentangle itself from a massive network of high-yield debt just got harder, but shareholders don't seem to mind.
The Overland Park, Kan.-based telecom giant has been far-and-away the worst performer of the big four networks, with shares tanking more than 20% in 2016. Rivals AT&T (T) and Verizon (VZ) both posted major gains on the year of about 6% and 8%, respectively, while T-Mobile (TMUS) ticked down just over 1%.
Investors were temporarily put at ease when Sprint posted fourth-quarter earnings late last month, especially with CEO Marcelo Claure's announcement that Sprint was able to add more than a $1 billion in cash through a sale-leaseback, as well as expand its credit facility, boosting total liquidity by more than $2 billion.
But Sprint's debt problems may be getting worse, as Standard & Poor's downgraded its already sub-investment-grade bonds one notch Tuesday to "B," citing an inability to grow its subscriber base.
Sprint has learned the hard way the price of taking on high-yield bonds, as it now touts about $34 billion of costly debt and has failed to generate a profit in each of the last six quarters.
Yet while its bonds have traded down sharply in secondary markets after the S&P cut, shareholders seem to have a short memory, as shares climbed 6% Thursday morning, indicating renewed confidence in Claure's ability to cut costs.
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"The downgrade reflects our view that Sprint will be challenged to profitability grow its subscriber base and reverse negative FOCF trends sufficiently to improve its longer-term liquidity position in the face of intense competition and mature market conditions in the U.S. wireless industry," according to the S&P report led by Allyn Arden.
"Despite some positive developments, including improving post-paid subscriber trends (366,000 post-paid phone net additions in the third quarter of 2015 compared with a loss in the prior-year period), and the establishment of a new handset leasing company, we believe that a combination of pricing pressure and a shift to installment and leasing plans will make it challenging for Sprint to grow into its capital structure longer term, although the leasing company does partially mitigate working capital pressures in the near term," the analysts said.
Sprint is among Real Money's list of 20 distressed stocks that investors should keep on their watch list, largely because Claure needs to prove he can eventually turn a profit in order to get out of its high-yield mess.
For more on Real Money's 20 distressed companies to watch: