On February 11, 2020, a U.S. district judge ruled in favor of a $26 billion deal for Sprint Corp. to merge with T-Mobile, creating the third largest mobile carrier in the U.S. This announcement was unexpected, sending shares of Sprint up 77.50% and shares of T-Mobile up 11.78%. Bonds of Sprint were held in a number of Signature fixed-income and balanced mandates, with some issues seeing prices increase of 10 –18 points. We believe that the below commentary highlights the fundamental credit analysis performed by Signature’s High Yield Team. Signature’s global sector specialist model and focus on cross-asset collaboration also resulted in Sprint insights, as our team was able to leverage analysis from Malcolm White, Portfolio Manager within the Signature Technology, Media and Telecommunications Team.
Backdrop – market underappreciation
Signature has been a significant lender into Sprint Corp. for a number of years, as our research led us to believe that the regulatory environment was likely to soften in favour of an attempted combination of the third largest (T-Mobile) and fourth largest (Sprint) wireless operators in the U.S., which we believed was not reflected in bond valuations. We also were of the view that the market was underpricing the importance of Sprint’s 2.5GHz mid-band spectrum holdings, which was increasingly becoming important as the global build-out of 5G standards continued.
We began to accumulate Sprint bonds in 2015, during the energy-driven high yield correction, when prices were significantly below par. Despite the significant discount, we felt there was much more upside to owning the name compared to potential losses.
The art of the deal
A merger deal was announced in April 2018 and the long regulatory approval clock began. Throughout that time, Sprint had been a core high-yield holding, but we used market and credit-specific volatility to add various issues and swap into longer duration bonds when the Sprint curve steepened.
The U.S. Department of Justice (DOJ) approved the deal in July 2019, having already secured Federal Communications Commission (FCC) approval. However, 14 State Attorneys General responded with a lawsuit, primarily driven by New York and California.
We developed and monitored probability-weighted upside/downside scenario analysis on our Sprint holdings through the regulatory and trial deliberation periods. This process led us to slightly trim our long duration position when the return prospects looked asymmetrically skewed to the downside.
The market began to discount a New York District Court win and deal probability dropped to between 40-50% through the bond complex, but we held on with the belief that the Judge would not break from the precedence of upholding previously DOJ and FCC blessed deals.
We had been expecting a ruling by the end of the month, but on February 10, 2020, it leaked that presiding Judge Marrero had notified both sides of his position to approve the merger in the morning. The story broke after the trading session had ended and was not reflected in either the bonds or equity until afterhours trading. Both the stock and bonds of Sprint opened significantly higher on the morning of February 11, with the bonds up 10 –18 points higher.
The merger agreement expired November 1 without extension, so the deal will likely be renegotiated in favour of T-Mobile, however this will not affect the current repricing of Sprint bonds.
S 6 ⅞ 11/15/28 Corp represents the Sprint corporate bond that had a 6 ⅞ coupon and matured on November 15, 2028. Source: Bloomberg Finance L.P. as of February 12, 2020.
Portfolio positioning and T-Mobile outlook
The new combined company will be called T-Mobile USA, and the deal will be partially financed by new T-Mobile investment grade-rated secured debt. The T-Mobile bonds will benefit from a guarantee at the operating company, while the Sprint unsecured bond – which are the issues that we have primarily owned - will be refinanced over time. We will likely reduce our holdings as the spreads on Sprint bonds compress towards T-Mobile’s spreads and other comparable cable company spreads.
Although we have slightly trimmed our position in recent weeks, many Signature mandates participated in the success of this trade including; Signature High Income Fund, Signature Global Income & Growth Fund, Signature Corporate Bond Fund, and Signature High Yield Bond Fund.
Fund opportunities and standard performance (%)
|Overall Morningstar Rating™||1 Year||3 Years||5 Years||10 Years||Inception Date||Since Inception|
|Signature High Yield Bond Fund Class F||9.2||5.7||5.7||-||7/31/2013||6.5|
|Signature Corporate Bond Fund Class F||9.3||5.1||4.7||6.1||7/15/2003||5.7|
|Signature High Income Fund Class F||
|Signature Global Income & Growth Fund Class F||
Source: Morningstar, CI Investments as of January 31, 2020
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For Signature High Yield Bond Fund F, the star ratings and number of High Yield Fixed Income funds for each period are as follows: overall - 5 stars; 3 years – 4 stars, 379 funds; 5 years – 5 stars, 263 funds. For Signature Corporate Bond Fund F, the star ratings and number of High Yield Fixed Income funds for each period are as follows: overall – 4 stars; 3 years – 4 stars, 379 funds; 5 years – 4 stars, 263 funds; 10 years – 4 stars, 71 funds. For Signature High Income Fund F, the star ratings and number of Global Neutral Balanced funds for each period are as follows: overall – 4 stars; 3 years – 4 stars, 1,239 funds; 5 years – 3 stars, 913 funds; 10 years – 4 stars, 385 funds. For Signature Global Income & Growth Fund F, the star ratings and number of Global Neutral Balanced funds for each period are as follows: overall – 5 stars; 3 years – 4 stars, 1,239 funds; 5 years – 4 stars, 913 funds; 10 years – 5 stars, 385 funds.
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Published February 19, 2020