This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.
It appears Sprint (S) is becoming even further entangled in its network of high-yield debt.
Two tranches of its non-investment-grade bonds were among the most actively traded Monday, dropping more than 3% in secondary trading, while shares plummeted 11%.
Sprint's roughly $2.5 billion of high-yield bonds maturing in 2028, paying nearly 7% in annual interest, are rated Caa1 by Moody's, and traded down more than 3% Monday to just under $0.61 on the dollar, according to bond tracking service Trace, a division of the Financial Industry Regulatory Authority.(The tranche's credit rating is seven notches below investment grade.)
What's holding the Overland Park, Kan.-based telecom giant down (as opposed to peers such as Verizon (VZ) and AT&T (T), which traded fairly flat on the day) was reiterated in a recent credit downgrade by Standard & Poors.
And it now appears the reality is beginning to set in.
As Real Money reported, S&P downgraded its already sub-investment-grade bonds one notch last week to "B," citing an inability to grow its subscriber base. Shareholders reacted slowly to the news, with equities rebounding from the downgrade quickly, despite analyst cautions.
The Deal: Much of wireless up for political grabs
Sprint now touts about $34 billion of debt, and booked a $1.4 billion loss over the last four reported quarters. Meanwhile free cash flow, a metric used to gauge a firm's ability to repay debt, was negative over the period, at an aggregate of more than $4 billion in the red.
"The downgrade reflects our view that Sprint will be challenged to profitably grow its subscriber base and reverse negative free operating cash flow 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.
Shares are down roughly 30% year to date, vs. 10% and 8% gains at Verizon and AT&T, respectively.
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: