Taking on debt can be a prudent financial decision for growing companies, especially in the current low-interest rate environment. However, too much debt could end up leading to the downfall of Chesapeake Energy (CHK), Sears Holdings (SHLD) and Sprint (S).
Chesapeake Energy (CHK)
CHK is only one of hundreds of oil & gas companies that are struggling with their debt while oil prices continue to flounder around $40/bbl.
Reports came out a few weeks ago that CHK is trying to take some creative measures to prevent its staggering $10 billion in debt from dragging the company into bankruptcy. CHK is reportedly considering swapping some of its debt for new 1.5 lien debt. CHK bonds maturing in 2017 and 2018 were trading at just 70 and 50 cents on the dollar, respectively.
For bondholders that expect the company to eventually opt for bankruptcy, lien debt would allow them the option of giving up principle in exchange for a spot in the repayment line between first and second lien holders in the event of liquidation.
As recently as February, CHK said it “currently has no plans to pursue bankruptcy,” but the market is not convinced. Shares of CHK are down an incredible 84% in the past two years.
While Chesapeake is certainly in big trouble, the next two stocks on this ignominious list are just as bad…if not worse.
Sears Holdings (SHLD)
Another company that appears to have exhausted all of its options in dealing with its debt issues is SHLD. Last year, SHLD was able to raise $2.7 billion by spinning off 266 of its real estate properties into REIT Seritage Growth Properties (SRG). The move provided some much-needed relief from its $4.2 billion in short-term debt and $1.9 billion in pension obligations. Unfortunately, as investors like Warren Buffett realized, the real estate was SHLD’s most valuable asset. SHLD is now left to try to figure out how to deal with its large and growing debt, and its negative earnings and cash flow in the face of growing e-commerce competition.
SHLD burned $2.5 billion in cash in 2015. It recently proposed a new $750 million term loan due in 2020 to help pay down revolver borrowings and give the company more time to execute its current turnaround strategy.
Once again, the market is not buying it. SHLD is down 68% in the past two years.
Sprint (S)
Each passing year it becomes more and more obvious that Sprint can’t compete against the likes of AT&T (T), Verizon Communications (VZ) and T-Mobile (TMUS). Sprint is the smallest of the four and has the least amount of resources. Maintaining a spot among the top telecommunications companies requires massive investments in technology and spectrum. Sprint currently has a market cap of only about $13.8 billion, but is holding a staggering $30.4 billion in long-term debt.
If the company’s business were trending in the right direction, maybe that debt would be manageable. However, Sprint generated a $3.35 billion loss on -$3.55 billion in free cash flow in fiscal 2015. Sprint only had $2.2 billion in cash on its books at the end of last year, but that cash won’t last long unless something dramatically changes about its business.
Sprint seems to be just large enough to worry potential buyers about the antitrust implications as well, especially after the TMUS/T merger debacle just a few years ago. Sprint shares are now down 63% in the past two years.
As of this writing, Wayne Duggan had no positions in any of the stocks mentioned.
