Everyone knows that Sprint Corp (S) has a debt problem. And while the $33.8 billion in “total debt” that Sprint reported in its most recent quarter is cause for major concern, many investors don’t realize that this telecom is the quintessential master of hiding off-balance sheet debt.
Unfortunately for Sprint, and investors, off-balance-sheet debt is still debt — and it will only drive the company and Sprint stock into the ground faster than expected.
Sprint’s Hidden Debt
In the coming years, telecom companies will have to factor expenses for operating leases as part of their debt load. Importantly, such leases have always been debt, but companies like Sprint have not had to report the expenses as such.
Nevertheless, the research firm MoffettNathanson recently found another roughly $17 billion that will soon be added to Sprint’s debt calculation. That means Sprint has nearly $51 billion in debt, not $33.8 billion.
To make matters even worse, there’s a good chance that Sprint’s debt is even higher than the $51 billion noted herein.
I am referring to the two financing vehicles that SoftBank (SFTBY) and an unnamed partner created for Sprint last year to help with its leasing program and network upgrades. This means that SoftBank and this unnamed partner(s) finances the costs of Sprint’s leasing and network upgrade expenses, and Sprint will end up making payments on the debt.
That debt is off Sprint’s balance sheet. However, because leasing and network improvements account for most of Sprint’s capital expenditures, investors can rest assure that the debt is significant, and will only grow long-term.
Why Sprint’s Road Leads to Bankruptcy
Fact is that all debt, whether it be on or off balance sheet must be paid, and if Sprint can not pay its debt, it must default.
With that said, the effect of operating at annual losses for nearly a decade is that Sprint’s debt haul has continued to rise year-after-year. Up until this point, tricky accounting, low maturation rate, and Sprint stock equity has kept the company afloat. However, Sprint’s past spending is finally catching up with it, with its credit rating essentially junk and its obligations soaring.
Last year, just $1.2 billion in Sprint debt matured. In 2016, that figure jumps all the way to $3.6 billion — a payment that is much more difficult to make. As a result, the fact that Sprint aims to cut $2.5 billion in operating expenses this year is just about irrelevant, with all of those cost savings and them some having to go toward paying back its obligations.
When you consider that Sprint stock could be in the realm of $4 billion free cash flow negative for 2016, plus the fact that Sprint has lost nearly three-fourths of its value since 2014, it is clear to see that the company is low on options when it comes to managing its debt load.
Sooner or later, high debt will punish a company — especially when that company remains unprofitable. Given the totality of Sprint’s debt coupled with an inability to see light at the end of its tunnel, investors must conclude that a bankruptcy is far more likely than not.
Don’t get tricked into buying Sprint stock. The future does not look bright.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.