Knowledge. Shared Blog

July 2019

Deal or No Deal? What T-Mobile’s Proposed Acquisition of Sprint Could Mean for Bond Markets

T-Mobile’s proposed acquisition of Sprint currently hinges on whether the Department of Justice decides to allow the transaction or takes legal action to block it. The eventual outcome will have significant implications for the telecom sector and for the investment-grade and high-yield bond markets. Co-Head of Global Credit Research and Portfolio Manager John Lloyd and Credit Analyst Mike Talaga discuss potential outcomes.

Key Takeaways

  • Depending on whether the transaction is allowed to proceed, several different scenarios could unfold, each of which would carry different implications for bond markets.
  • In combination, T-Mobile and Sprint represent nearly 3% of the high-yield market. If the transaction is approved, T-Mobile’s intent to migrate to an all investment-grade balance sheet could create a technical tailwind in high yield as the companies’ combined debt shifts out of the high-yield universe and into investment grade.
  • Should the deal fall through, other consolidation activity could ultimately unfold for one or both entities. Alternatively, Sprint’s roughly $28 billion in debt – recently rated CCC by Moody’s – could return to stressed levels, which could impact the yield of the high-yield market as well as investors’ appetite for risk in a much lower-rated company.
View Transcript

John Lloyd: We are here today to talk about the Sprint/T-Mobile merger and the implications it has on the market. Mike, starting off, can you give us an update on where we stand with the transaction?

Mike Talaga: Sure. In April of last year, T-Mobile announced that they were going to acquire Sprint Corporation in an all-stock transaction valued at around $59 billion. The company was pursuing the transaction for significant synergies and allowed it to increase its scale and converge on the size of its rivals, AT&T and Verizon. And more importantly, it allowed T-Mobile to have a treasure chest full of spectrum, which would allow it to catapult its foray into 5G.

In the telecom industry marketplace, there were four players, and this transaction would take it down to three players. And as such, there was significant scrutiny both from regulators and advocacy groups against the transaction. And T-Mobile has consistently contended that it would, one, benefit consumers, two, create jobs, and three, importantly in this political environment, allow the U.S. to maintain its 5G leadership and not allow China to leapfrog the United States in that regard. Where we are today is awaiting the decision from the Department of Justice as to whether they will allow the transaction to go through or whether they will sue to block the transaction. And we expect this decision to come imminently.

Lloyd: So, Mike, what are the broader sector implications for the telecom sector that you cover?

Talaga: If T-Mobile is allowed to pursue and go through with the transaction, it has said that it will issue approximately $40 billion of investment grade debt. Currently, portfolio managers are pretty much limited to AT&T and Verizon as the two domestic telecom operators. If T-Mobile is allowed to acquire Sprint, there will be $40 billion of incremental investment-grade debt, which they could reallocate into T-Mobile. This could create technical headwinds for the existing operators out there. In the high-yield market within the sector, T-Mobile has said over the coming years it will migrate into investment-grade, full investment-grade balance sheet. This will have implications as T-Mobile and Sprint currently represent 3% of the high-yield market.

If the transaction is not approved, there are many what ifs and implications that could come down. Sprint was recently rated CCC by Moody’s. Investors will express caution to see if Sprint will return to these stressed levels. Or, will a new suitor emerge to pursue Sprint and acquire the company? Or will SoftBank, Sprint’s majority owner, step up and inject capital if needed into the company? Conversely, for T-Mobile, if the transaction doesn’t go through, that company will need incremental spectrum. And the question will be, Will it look to another large high-yield index position in Dish in order to transact?

And so John, I’ll turn it over to you. What are the implications on the broader market on whether the transaction goes through or if it does not?

Lloyd: Yeah, one of the things we have seen in the high-yield market, Mike, is the market has been shrinking over the last three years. So, a couple of the drivers of the high-yield market actually shrinking are coupons that have to be reinvested over time as well as inflows … we have seen pretty big inflows into the market. Those have to be reinvested. And then rising stars, falling angels. So, what is the number of companies that are getting upgraded into the investment-grade index and coming out of the high-yield index versus the companies that are getting downgraded out of investment grade into high yield? And we have seen more upgrades than downgrades.

The good news for high yield here is it will create a pretty big technical, because you have T-Mobile, who has $11 billion of debt today, and you have Sprint that has around $28 billion of bonds today, both are in the high-yield market, they are the number one and number seven names. And as you said, if their desire is to eventually become investment grade over time with a merger, that paper is going to come out of the high-yield market.

Talaga: So, from a valuation perspective, what implications are there to the high-yield market?

Lloyd: Yeah, I think all things equal, if we saw the deal get approved and go through, and we saw Sprint and T-Mobile debt get upgraded to IG, it would be favorable for the valuations in high yields. You could see high yield tightening further from existing levels.

I think conversely, if we do see a deal fall apart, you are going to have Sprint… right now Sprint is not trading like a CCC, but if somebody doesn’t step in, whether it is SoftBank providing capital or another merger partner, we could see that paper add to the CCC bucket and start trading more in line with other CCCs and more stressed levels, and that will have some effects on the yield of the high-yield market and just overall investors’ appetite for risk in a much lower-rated company. So those are the two biggest implications in the market today.

 

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