T-Mobile
T-Mobile is the second largest US telecom company by subscribers. In 2021 it generated over US$80bn in revenue from providing mobile phone and wireless internet services to over 108 million customers.

Today’s T-Mobile was formed in April 2020 when T-Mobile acquired Sprint Communications (“Sprint”). The transaction consolidated the US telecom market from four major wireless players to three. It also grew T-Mobile’s scale to better compete, sought to generate cost synergies (or savings) of over US$7bn and gave T-Mobile access to Sprint’s large spectrum assets – crucial for T-Mobile’s 5G rollout.

To fund the acquisition of Sprint, T-Mobile raised a large amount of debt, leaving post-acquisition debt high relative to earnings. The expectation was that integration of the two companies over the following three years would improve T-Mobile’s credit profile through earnings growth (including via cost savings) and using cash flow to manage debt towards more appropriate long-run levels.

The planned integration of two different business cultures, operations, telecom networks, and the migration of Sprint’s customer base, while also rolling out its 5G network, was not without risks. Our analysis, however, gave us confidence in management’s capabilities to successfully execute the integration while maintaining business momentum, generating sufficient cash flow to fund the material associated costs, and leveraging its strong spectrum assets. We expect that in time, merger-related and 5G spend will subside, and cost synergies be realised, generating significant cash flow to support its credit profile.

Investment thesis for investing in T-Mobile’s unsecured bonds
Some of the debt raised by T-Mobile was directly secured by some of T-Mobile’s assets and some was unsecured. Given the superior position of the secured debt, this was rated ‘investment grade’ by rating agencies. The unsecured debt was rated ‘high yield’ and offered a higher return in compensation for its weaker position.

We expected, and continue to expect, that as T-Mobile successfully executes the integration, its credit profile will improve so that the unsecured bonds will also become Investment Grade. Not only should this see the return on the unsecured bonds outperform T-Mobile’s secured bonds as its traded yield (or interest rate) would fall on a relative basis (lower yield for bonds means higher price), but it represents an attractive risk/reward opportunity relative to many other bonds available in the market (where companies often aim to maintain, rather than improve their credit profile).

Progress against our thesis
To date T-Mobile’s integration continues to plan, progressing customer, operational, and network milestones and achieving cost synergies. More broadly, in a highly competitive market it continues growing earnings organically – via subscriber growth and strategic initiatives such as its 5G rollout – well ahead of its peers.

This progress has supported our investment thesis. Late last year rating agency Fitch upgraded the unsecured bonds to Investment Grade, and in May Standard and Poor’s put their rating on ‘Credit Watch Positive’, suggesting they too may upgrade the unsecured bonds to Investment Grade.

We continue to believe the unsecured bonds offer an attractive reward for the level of risk and anticipate further credit and associated rating improvements which should drive outperformance of the bonds. We see global investment opportunities such as this as offering good, liquid, opportunities for attractive risk adjusted returns and portfolio diversification not readily available in Australasia.