Clearwire Weighs Conserving Cash or Keeping Creditor Support
Clearwire Corp. (CLWR), facing a $237 million interest payment tomorrow, will have to decide between conserving cash to fund its wireless business or satisfying creditors the company may need for financing in the future.
The wireless broadband company, with almost $700 million in cash and short-term investments at the end of September, has the money to cover the payment. Still, making the payment would cut into capital at Clearwire, which has said it needs about $1 billion to fund operations and transition to faster wireless technology. The company can exercise a 30-day grace period if it wants to push back the decision.
The company will probably pay the money because it doesn’t want to alienate investors it may need to tap for additional capital, said David Novosel, an analyst at Gimme Credit LLC.
“The idea of an equity infusion or raising debt is highly unlikely given the status of the company and the capital markets environment” if they don’t pay, Novosel, who is based in Chicago, said in an interview.
One consideration that may play into the decision is whether Clearwire can complete negotiations for a new network- sharing agreement with Sprint Nextel Corp. (S) Sprint, which is the largest shareholder in Clearwire and its largest wholesale customer, hasn’t committed to extending their existing agreement beyond 2012. A new agreement with Sprint would put Clearwire on more stable financial ground and may help it raise capital.
Clearwire, based in Bellevue, Washington, may be pressuring Sprint for a new wholesale agreement before it decides whether to make the payment, said Ping Zhao, an analyst at CreditSights Inc. in New York. A failure or delay in paying creditors would indicate that the two aren’t close to reaching a deal, she said.
“Right now Sprint is learning that if you don’t play nice, everyone gets all nervous,” Zhao said in an interview. “Usually what’s good for Clearwire is bad for Sprint. That’s the holdup.”
Mike DiGioia, a spokesman for Clearwire, and Scott Sloat, a spokesman for Sprint, had no comment.
Clearwire technically has until 5 p.m. New York time tomorrow to meet the first-day deadline, said Kevin Smithen, a Macquarie Capital USA Inc. analyst in New York.
“At 5 p.m. the debt trustees’ office closes,” he said. Smithen doesn’t rate Clearwire and rates Sprint a “buy.”
Outlook for Shares
A missed payment probably would send the shares down on concern that a restructuring would follow. If Clearwire seals its contract extension with Sprint and makes its debt payment, the shares will likely rally, Smithen said.
“We expect a deal with Sprint will be made before the deadline and that will enable Clearwire to make the payment,” he said.
Clearwire Chief Executive Officer Erik Prusch told the Wall Street Journal this month the company was evaluating whether to pay the interest. The “very expensive payment” to creditors would be a “significant drain” on cash, he said.
Sprint would have the most to lose in a Clearwire bankruptcy, Zhao said. Sprint, which buys wireless capacity wholesale from Clearwire and resells the service to its customers, may lose access to that spectrum in a restructuring, when creditors gain influence. Creditors may push to sell off Clearwire’s wireless spectrum to the highest bidder, making it more challenging for Sprint to serve its customers, she said.
Clearwire’s spectrum assets are worth more than the company’s debt, which totaled more than $4 billion at the end of September, Zhao said. Creditors will likely do fine if the company can sell off its assets, she said.
Clearwire gained 13 percent to $1.78 at the close in New York. The shares have declined 65 percent this year.
The company’s bonds rallied the most in a month. Investors demand an 18.6 percent yield to hold a Clearwire bond maturing in December 2015. That compares with the bond’s 9.2 percent yield on May 24, the year’s low. Clearwire is rated CCC by Standard & Poor’s, which means it is dependent on economic conditions to access debt markets. Most of Clearwire’s debt is due in 2015, according to data compiled by Bloomberg.
S&P has said it could downgrade the company’s rating to D, for default, if it doesn’t pay within the first five days. Allyn Arden, an S&P analyst, said paying creditors would leave Clearwire only $350 million to $400 million for next year’s operations.
“It would still have to raise significant capital to maintain operations in 2012 despite the cost-reduction measures it has already achieved,” Arden said in a statement.
Clearwire’s decision on the payment will be a sign of how hard it’s willing to push Sprint, said Gordon McKay, an analyst at Marret Asset Management.
“It’s a strategic decision,” McKay said in an interview. “Do they want to escalate this process? Do they want to signal to the market that they’re willing to default if they can’t get funding soon?”
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