May 1 (Bloomberg) -- Sprint Nextel Corp., the U.S. wireless company that lost more than a million contract customers last year, had its credit rating cut to junk by Standard & Poor's.

The carrier's corporate credit and senior unsecured debt ratings were lowered two levels to BB from BBB- because of its deteriorating operating performance, S&P said today in a statement.

Sprint lost $29.6 billion last year as customers moved their business to larger rivals AT&T Inc. and Verizon Wireless. Since taking over in December, Chief Executive Officer Dan Hesse has relocated the company's headquarters to Overland Park, Kansas, from Virginia to save money. He also removed three top executives, including the chief financial officer.

``The biggest factor is the ongoing subscriber losses,'' said New York-based S&P analyst Allyn Arden in a telephone interview. ``There is concern that they will have a problem reversing that over the next two years.''

Sprint's 6 percent note maturing in December 2016 fell 0.25 cent on the dollar today to 82.75 cents, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The yield rose to 8.92 percent. On Feb. 1, the note was trading at 89.47 cents on the dollar and had a yield of 7.66 percent.

Sprint rose 3 cents to $8.02 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have dropped 39 percent this year. Company spokesman James Fisher said Sprint had no comment on S&P's action.

New CFO

Today, Hesse named former Eastman Kodak Co. executive Robert H. Brust, 64, as chief financial officer. Brust is the first top executive appointment since Hesse, 54, got rid of the heads of finance, marketing and sales in January.

``The entire management has its work cut out for it,'' said Christopher King, a St. Louis-based analyst at Stifel Nicolaus & Co. who advises holding on to the shares and doesn't own any. ``They should not be an investment-grade company right now.''

The new finance chief may have to contend with higher borrowing costs now that Sprint's S&P's credit rating is two levels below investment grade. The company's total debt outstanding as of the end of 2007 was $22 billion, S&P said.

Sprint may report a net loss of $416.6 million in the first three months of the year, the average estimate in a Bloomberg survey of analysts. Declining earnings may trigger debt provisions allowing creditors to demand early repayment.

Under the terms of its loans, Sprint has to keep earnings before interest, tax, depreciation and amortization equal to about 30 percent of total debt, according to a regulatory filing. Profit may drop below that level as soon as the end of 2008, Jefferies & Co. analyst Romeo Reyes said in a March 3 report.

`Tripping'

``They may be in danger of tripping debt covenants sometime in early-to-mid 2009,'' said Stifel Nicolaus's King. ``Those are legitimate concerns for the company right now.''

Sprint may use the remainder of a $500 million revolving credit facility it has and then try to renegotiate covenants on its debt, according to Jefferies analyst Reyes.

A failure to amend those conditions might result in ``billions of debt being put to them as cross defaults are triggered on the rest of its debt instruments,'' he wrote in a March 3 note. ``In this case, the company would have to file for Chapter 11.''

Fitch Ratings cut its rating on Sprint to BB+ in February, one level below investment grade. Moody's Investors Service has said it may reduce Sprint's ratings to junk status, too.

Sprint's larger rivals AT&T and Verizon Wireless enjoy investment-grade ratings.

Default Swaps

The cost to protect Sprint bondholders from default has been falling for the past month after peaking on March 5 at 711 basis points for the five-year credit-default swap, according to data compiled by Bloomberg. Sprint credit-default swaps narrowed 13 basis points to 465 basis points after the announcement of the ratings cut, according CMA Datavision.

A basis point on a credit-default-swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net.

Last Updated: May 1, 2008 16:52 EDT