Corporate Finance | Sprint Looks At Greener Pastures as Clearwire Debt Indicates Distress

Corporate Finance News

Corporate finance experts warn that bonds of Clearwire Corp. (CLWR), the company which will be completely sapped of cash by 2012 according to Standard & Poor’s, are already beginning to show symptoms of impending default. That is even as partner, and Clearwire’s largest stakeholder, Sprint Nextel Corp. has, in the typical fashion of rats abandoning a sinking ship, moved to strike a deal with a competing internet service provider.

The wireless provider, already unprofitable for some time now, saw its bonds fall another 12 per cent this month. This drop could mean that Clearwater won’t be able to raise the capital it needs — in a bid to salvage the fast-dwindling customer base — to Transition to the technology that’s already being used by rivals.

Yields on Clearwire’s debt have increased by 4.35 percentage points from 10.87 percent since Sprint’s 15 year deal with LightSquared to provide network carriage for its mobile-phone service was announced on July 28, compared with an average 0.9 percent rise for bonds.

Corporate Finance | Capital Needs

Clearwire requires about $150 million to $300 million of capital to meet the expenses of upgrading its current network to a technology called WiMax. The company plans to spend about $600 million to add so-called Long-Term Evolution technology to its network.

Sprint had their voting stake in Clearwire whittled down to 49.8 percent from 53.7 percent, in a move to quell the popular percention that Clearwire is a subsidiary. The change does not reflect a change in Sprint’s equity stake in Clearwater, say corporate finance analysts.

Long-Term Commitment
That Clearwire’s fixed-income securities are now falling is indicative of a decline in bondholder confidence that Sprint just isn’t it for the long haul any more, say corporate finance consultants.

Clearwire’s second-quarter net loss expanded to $168.7 million, or $1.01 per share, from $125.9 million, or 61 cents. 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.

The company fell 16 percent yesterday, to $1.52, in New York Stock Exchange composite trading, the lowest since its initial public offering in March 2007.

Corporate Finance | ‘Sufficient Liquidity’

Company spokespersons claim that Clearwater has more than sufficient liquidity to fund their current WiMAX operations for the next twelve months, a view shared by some independent corporate finance analysts.

However, some corporate finance analysts predict that Clearwater’s on a downward trajectory and will run out of liquidity by mid 2012, based on figures that reveal a substantial debt burden, and a lack of positive cash flows in spite of immense expenditures.

Corporate Finance | Negative Outlooks
S&P lowered Clearwire’s CCC+ credit rating to ‘negative’ after announcements of the company’s second quarter results. Bonds at the CCC level are regarded as having a high degree of credit risk, with debt service dependent on favorable economic conditions.

In April, Kansas-based Sprint signed an agreement with Clearwire to pay the company at least $1 billion, over the next two years, for the use of its purportedly fourth-generation network. 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 year, according to a joint statement.
So far Sprint’s spokespersons are not commenting on the new developments, and corporate finance pundits do not know what to make of this silence.

Clearwire’s would clearly 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, according to corporate finance professionals.

While defaulting isn’t that imminent that it would be likely to happen in the next quarter or so, it is a greater possibility now that it was about three months ago, say corporate finance experts.