Sprint: Macquarie Sees Risk In High-Yield Breakdown

Macquarie Securities’s Kevin Smithen today cut his price target on four of the U.S.’s smaller telecom companies’ stocks, Sprint-Nextel (S), Frontier Communications (FTR), Leap Wireless (LEAP), and MetroPCS (PCS), writing that the companies, highly leveraged, are threatened by the breakdown of the high-yield bond market and the resulting increase in premia on their debt.

Smithen notes the bonds of all of them are seeing rising premia, as measured by credit default swaps, and are seeing a spike in yields.

Sprint’s bonds maturing 2019, which have a coupon of 6.9%, are currently trading with a yield of 9.4%, for example. Frontier has seen its 2022 bonds with an 8.75% coupon blow out to a 10% yield. PCS’s 2020 issues with a 6.625% coupon are at 8.45% yield, and Leap’s 2020 issues with a 7.75% coupon are trading at 9.9%.

Smithen takes his cue from the movie “Moneyball,” in which baseball sabermetricians correlate the statistical value of players who get on base frequently. He sees a disturbing statistical correlation between these stocks and the index of high yield corporate paper:

Widening yield spreads could cause leveraged telco equity values to �overshoot� on the downside over the next few months as they did in 2008. Names such as LEAP, FTR, S and PCS have the most correlation to the high yield indices and could see further share price erosion if the high yield markets deteriorate further.

The actual concern is that the higher premia threaten higher borrowing costs for companies such as Sprint whose network expansion capital requirement is not fully funded.

Smithen cut his price target on Sprint to $3.73 from $4.10, while reiterating a Neutral rating. His target on PCS goes to $14.25 from $16.50, though he maintains an Outperform rating on the shares. Smithen rates Leap stock Underperform and cut his price target to $40 from $6.35. He downgraded Frontier shares to Underperform from Neutral and cut his price target to $5 from $7.20.

Smith recommends telco investors focus instead on “investment grade” names such as Verizon Communications (VZ) and CenturyLink (CTL).

This afternoon, all four of those names are trading down worse than the Nasdaq’s 2% decline:

Sprint shares are off 13 cents, over 4%, at $2.90;
MetroPCS is down 44 cents, or 5%, at $8.26;
Leap is off 68 cents, or almost 10%, at $6.23;
and Frontier is down 37 cents, or 6%, at $5.74.

� Widening yield spreads could cause leveraged telco equity values to �overshoot� on the downside over the next few months as they did in 2008. Names such as LEAP, FTR, S and PCS have the most correlation to the high yield indices and could see further share price erosion if the high yield markets deteriorate further.