Moody's Investors Service has downgraded Clearwire's (NASDAQ:CLWR) credit ratings deep into junk territory, sounding the alarm over Clearwire's need to find a partner other than Sprint Nextel (NYSE:S), which recently went out of its way to detail a 4G strategy that didn't include the company that Sprint owns the majority of.
Moody's cut the corporate family rating to Caa2 from Caa1 and its probability of default rating to Caa3 from Caa2.
"Despite over a year of torturous negotiations and several management changes at Clearwire, the two companies remain unable to reach a long-term agreement that would be mutually beneficial," Moody's said in a statement.
Moody's said Clearwire will be hurt financially once its partnership with Sprint ends as Sprint has said it will sell WiMAX devices through 2012. Further, Clearwire requires additional funding to build out its TD-LTE network. Clearwire has said it needs to raise between $150 million and $300 million for the maintenance of its existing WiMAX network and $600 million to begin rolling out LTE-Advanced network technology.
Moody's believes that Clearwire will have to sell spectrum to raise cash.
Meanwhile, Moody's also cut its rating of Sprint's overall creditworthiness to B1 from Ba3 because of the operator's go-it-alone 4G strategy, which will cost billions more than if it struck an arrangement with Clearwire, the firm said. The ratings change impacts about $20 billion of debt, wrote Moody's Vice President Dennis Saputo.
"Sprint has missed an opportunity to save billions of dollars of capex by failing to reach a win-win arrangement with Clearwire," he said. "Instead, management will ratchet up the execution risk and go it alone for the 4G upgrade path."
Rather than leveraging Clearwire's network, Sprint plans to deploy LTE in its 1900 MHz spectrum and migrate CDMA carriers to its 800 MHz band, which is currently occupied by iDEN. Sprint will begin dismantling the iDEN network in 2013.
Moody's said Sprint's capital needs brings risk right as the operator faces pressure on margins related to its introduction of Apple's (NASDAQ:AAPL) iPhone. Moody's believes Sprint will need as much as $8 billion through 2013 to fund the network build and meet debt maturities. Leverage will reach approximately five times (Moody's adjusted) in 2012 and remain in that range through 2013.
In related news, Clearwire released its preliminary third-quarter results and said it added 1.9 million wholesale customers. Clearwire said it expects revenue of around $332 million, up 126 percent year-over-year and up from $322 million the second quarter. The company posted a 29 percent sequential growth rate in wholesale subscribers. Clearwire's wholesale subscriber additions have historically been driven by Sprint devices riding on Clearwire's mobile WiMAX network. Clearwire said it will end the third quarter with around 9.5 million total customers, up from 7.65 million at the end of the second quarter.
For more:
- see this AP article
- see this Barron's article
- see this release
Related articles:
Clearwire adds 1.9M wholesale subs in Q3
Clearwire CFO: Vendor financing, spectrum sales could help fund LTE buildout
Verizon Wireless denies Clearwire wholesale talks
Clearwire courts AT&T, Verizon and others as wholesale customers
Sprint to launch LTE on 1900 MHz spectrum by mid-2012