Sprint investors fear Clearwire default could pull Sprint in too

Credit-default swaps on Sprint Nextel's (NYSE:S) debt have climbed 70.5 basis points to 376.6 since Clearwire (NASDAQ:CLWR) disclosed its need for additional funds. Investors are worried Sprint, which owns 54 percent of Clearwire, could be brought into default since it owns the majority of Clearwire.

Earlier this month, Clearwire said it is taking several measures to conserve cash as it seeks to secure new funding. These measures include a reduction in sales and marketing, delaying plans to launch Clear-branded smartphones, suspend operations in select markets such as Denver and Miami, cut its workforce and contractors and suspend development activities for cell sites that aren't part of its current buildout plan.

Sprint CEO Dan Hesse recently downplayed Clearwire's funding issues and what those problems may mean for the future of Sprint's 4G network plans. Speaking at the Open Mobile Summit last week, Hesse said Sprint might still invest additional money into Clearwire despite the company's troubles. Hesse said Clearwire's announcement was just a technicality and part of required SEC accounting. But analysts say Sprint simply can't let Clearwire default.

Still, investors fear that a Clearwire default may trigger a contract provision pulling Sprint into default as well. "Sprint will not wash their hands of Clearwire," Ping Zhao, a telecommunications analyst at New York-based debt- research firm CreditSights told Bloomberg. "Sprint will have to provide funding. The question is what concession it can extract from Clearwire, because Sprint needs Clearwire more than Clearwire needs Sprint to make sure they don't default."

According to a report from Standard & Poor's, a Clearwire default may impact about $9.9 billion of Sprint Capital's debt. Craig Moffet, analyst with Sanford C. Bernstein & Co, said Clearwire's only lifeline is Sprint, which can fund or buy Clearwire or amend a 1998 provision that links the companies in the event of default.

"Sprint may also decide that this is an operating problem and not a financing problem, and that they may be better off to try to extricate themselves from the cross-default provision," said Moffett. "Sprint may not have any good options, but it does have other options," he told Bloomberg.

Sprint said in a Nov. 5 regulatory filing that it would experience a material adverse effect if Clearwire defaults and is then considered a Sprint business.

Meanwhile, Bank of America/Merrill Lynch analyst Michael Funk raised his rating on Clearwire to "Neutral" from "Underperform."

"We maintain our cautious longer term fundamental view based on funding needs, competitive threats, and our proportionate valuation framework," he wrote in a research note. "Our upgrade here is based on the market's understanding of the company's funding challenges more closely aligning with our own, our view that the risk of Sprint abandoning CLWR is overstated, and our view that there is limited potential for incremental downside catalysts in the near term."

For more:
- see this Bloomberg article
- read this Barron's article

Related articles:
Clearwire cuts workforce, delays retail launches amid funding uncertainty
Hesse attempts to dispel concerns over Clearwire's future
Sprint trumpets 4G time-to-market advantages

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