Sprint Looks Away as Clearwire Debt Indicates Distress: Corporate Finance

Bonds of Clearwire Corp. (CLWR), the company Standard & Poor’s says will run out of cash in 2012, are approaching levels consistent with an impending default as partner Sprint Nextel Corp. strikes a deal with a competitor.

The unprofitable wireless broadband provider’s bonds have fallen 12 percent this month, the worst performer among junk- rated telecommunications companies in the U.S., Bank of America Merrill Lynch index data show. Its notes trade at an average yield of 15.2 percent, compared with 11.8 for CCC rated debt and 20.7 percent for CC, a grade that means a default is expected.

The drop reflects concern Clearwire won’t be able to raise the almost $1 billion it needs to pay to transition to the same technology that most of its rivals use and to maintain its current network. Bondholders also are concerned that the Kirkland, Washington-based company’s relationship with Sprint, its largest stakeholder, is in jeopardy after the carrier last month agreed to a 15-year deal with billionaire Philip Falcone’s LightSquared Inc., a Clearwire competitor.

“The bonds are taking a huge beating,” Ping Zhao, a New York-based analyst at CreditSights Inc., said in a telephone interview. “For Clearwire to get the funding, it needs Sprint to be on board. People are concerned Clearwire is just being cut out of the picture.”

Yields on Clearwire’s debt have risen 4.35 percentage points from 10.87 percent since Sprint’s agreement to have LightSquared provide network carriage for its mobile-phone service was announced on July 28, compared with an average 0.9 percent rise for bonds in the Bank of America Merrill Lynch High Yield Master II index.

Capital Needs

Clearwire needs to raise $150 million to $300 million of capital to help pay for its current network using a technology called WiMax, Chief Financial Officer Hope Cochran said in a conference call with investors after the company reported second-quarter earnings on Aug. 3. The company plans to spend about $600 million to add so-called Long-Term Evolution technology to its network.

Sprint told Clearwire on June 1 that it cut its voting stake to 49.8 percent from 53.7 percent to settle investor concern that the partner may be considered a subsidiary and that its debt would become a liability for Sprint. The voting change doesn’t affect Sprint’s equity stake in the company or its relationship as a customer.

Under LightSquared’s agreement with Sprint, the Reston, Virgina-based company will pay to build and operate a nationwide wireless network using LTE technology, the companies said in a statement.

Long-Term Commitment

The fall in Clearwire’s fixed-income securities reflects declining bondholder confidence that Sprint has a long-term commitment to the company, Dave Novosel, an analyst with Gimme Credit LLC, said in a telephone interview from Chicago.

“With Sprint’s LTE agreement with LightSquared, they’re thinking that maybe Sprint does not need Clearwire like it did before,” Novosel said. “In the near term it needs Clearwire, but longer term, Sprint could move away.”

The company’s second-quarter net loss expanded to $168.7 million, or $1.01 per share, from $125.9 million, or 61 cents, the company said in an Aug. 3 statement. Revenue more than doubled to $322.6 million, from $117 million. Earnings before interest, taxes, depreciation and amortization was negative $355 million in the second quarter, Bloomberg data show.

Clearwire was down 7 cents to $1.45 a share at 11:26 a.m. in New York Stock Exchange composite trading, the lowest price since its initial public offering in March 2007.

‘Sufficient Liquidity’

“We have sufficient liquidity to fund our current WiMAX operations for at least the next 12 months,” Susan Johnston, a spokeswoman for the company, said in an e-mail yesterday. “We expect our operations to begin generating positive EBITDA in Q1 of 2012.”

Cash and near-cash items fell to $78.8 million from $254.7 million a year earlier, the company said. Clearwire has $3.9 billion of bonds outstanding, including $2.7 billion coming due in December 2015, according to data compiled by Bloomberg.

“Clearwire’s on a trajectory and it will run out of cash by mid 2012,” Allyn Arden, an analyst with Standard & Poor’s in New York, said in a telephone interview. “The company already has a very elevated debt burden, they are burning through cash, and they don’t generate positive Ebitda or positive free cash flows.”

Negative Outlooks

S&P cut the outlook on Clearwire’s CCC+ grade to “negative” after the company reported second-quarter results. Moody’s Investors Service rates the company an equivalent Caa1, also with a “negative” outlook, it said in April. Bonds at the CCC level are considered to have very high credit risk, with debt service dependent on favorable economic conditions.

Clearwire underwent a management shake-up in March, naming Chairman John Stanton, 55, interim CEO after Bill Morrow resigned for personal reasons. Stanton replaced Craig McCaw as chairman in January when the pioneer of the mobile-phone industry retired.

Overland Park, Kansas-based Sprint, reached an agreement with Clearwire in April to pay it at least $1 billion for the use of its so-called fourth-generation network over the next two years. Clearwire will get $300 million this year, $550 million in 2012, as well as pre-payments of $175 million over at least the next two years, in a deal that is good through November 2013, according to a joint statement.

Scott Sloat, a spokesman for Sprint, declined to comment.

Sprint Bonds

Sprint’s bonds have fallen 4.9 percent this month, compared with a 3.47 percent decline on the Bank of America Merrill Lynch high-yield index. They gained 0.51 percent in July, the index data show.

The company’s $2 billion of 8.75 percent notes due March 2032 climbed 2.75 cents to 92.25 cents on the dollar at 11:19 a.m. for a yield of 9.62 percent, according to Trace, the bond price reporting system of the Financial Industry Regulation Authority. That’s down from 110.25 cents on July 27, the data show.

Clearwire’s prospects may suffer without support from Sprint because it would then have to rely on smaller carriers such as MetroPCS Communications Inc. and United States Cellular Corp., which wouldn’t bring in as much revenue, Gimme Credit’s Novosel said.

“Defaulting is not imminent in that it’s not going to be in the next quarter or so,” Novosel said. “Certainly it’s a possibility and it’s a greater probability now than it was three months ago.”

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Tim Catts in New York at tcatts1@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.

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