It shouldn't be a huge surprise based on the last earnings call (Combes strongly hinted they were looking at the high-yield market, even further so when asked a question during the Q&A); but overall, I'd say it is a pretty positive development. It shows Sprint has regained access to the high-yield bond market at terms fairly commensurate to when they last participated 3 years ago almost to the date. Plus, if you expect interest rates to rise, which certainly doesn’t seem unreasonable, now is probably as good of a time as any to lock in what you can. The other slightly positive way of looking at things is that Sprint management and Softbank appear to be comfortable with the financial position of the company right now to do this.
To the former, they strongly hinted they were going to do both. I don’t read anything regarding not being able to do something re: spectrum co. To the latter, there are plenty of reasons. The best of them being ideally the spectrum backed secured debt probably needs to be somewhat reserved for when it is actually needed. The solvency of the company to an extent was in question in early 2016 with some analysts estimating the company would run out of money unless something was done in the subsequent 18-24 months in large part due to $10+ billion in debt coming due in the following few years. The primary reason that Sprint was using spectrum backed debt vehicles, using 2.5 vendor financing options, selling future customer income at discount for money now, selling off phones and leasing them back, etc. is that the company was in such a giant liquidity pinch. This was compounded by the fact that the company effectively lost access to the high-yield debt market at the same time.
In Early 2016, Sprint’s debt that had been issued at par was trading at about 75 cents to the dollar with coupons in the 6-8% range was yielding 12-13.5% (implying that would be Sprint’s future cost of borrowing on any new high-yield debt). Robbiati came on at roughly the same time and said the following at one of his first investor conferences, “Would you really want to tap into the high-yield market at 10%, 12%?” No. It doesn’t make any sense.” So, they went the handset leasing, spectrum backed security route, which again isn’t without it’s downfalls. When it happened in 2016 a Bloomberg article likened it to “borrowing against the tires to make car payments.” An equity analyst in a WSJ article said, “it shows what kind of bind Sprint is in, when you have to collateralize the plates and silverware.” Neither are exactly wrong.
The spectrum backed debt has two advantages for Sprint. 1) The interest rate is significantly lower than the junk bond market and 2) it is a way for Softbank to get around some of their debt covenants and end-run-around inject money into Sprint. Both of those advantages come with some costs though. The spectrum is a finite asset and they already sold 14% of it off. Secured debt is cheaper for Sprint, because it is less risky for the lenders due to the fact their bonds are secured by the asset (in this case the spectrum). If Sprint were to hypothetically default or go bankrupt they in all likelihood lose the spectrum. The other bigger factor is that as illustrated in the paragraph directly above this one, there was a time less than two years ago when Sprint really had no other realistic borrowing options other than doing this.
In a lot of ways, you’d want to preserve the capacity to do this again if you absolutely needed to in the future i.e. a “rainy day” when the market conditions aren’t favorable or the company isn’t in a financial position to obtain funding through more traditional sources. The junk-bond market isn’t going to last forever if Sprint cannot show an ability to generate actual free cash flows on a consistent basis. Furthermore, the more they collateralize assets for securitized debt the greater the potential they cut themselves off from the traditional unsecured debt markets due to covenants, seniority placement, and concerns about Sprint’s capacity to payoff non-secured debt in the event of default. It literally could be the difference between getting 80-90% of your money back versus pennies on the dollar.
So the tl;dr of this is even if you can obtain debt cheaper by say offering 2.5 spectrum as collateral that isn't necessarily the better option. The whole reason Sprint was offering 2.5 secured debt or handset leasing vehicles was they didn't have access to traditional debt markets. It is certainly creative, cheaper borrowing that will have a place at S going forward. That said, tapping the high-yield market while Sprint can at relatively decent rates makes a heck of a lot of sense.
They'll tap Spectrum Co again soon based on the earnings call.