Will Sprint let Clearwire slip into bankruptcy?

Sprint Nextel's (NYSE:S) high-stakes leverage game with partner Clearwire (NASDAQ:CLWR) continues, and this time Clearwire is delivering the blow.

Clearwire CEO Erik Prusch revealed that the company is considering forgoing a $237-million debt payment due Dec. 1 in an effort to conserve cash.

"It's a very expensive payment that we have," Prusch said in an interview with the Wall Street Journal. "It would be a significant drain of our cash, so we have to evaluate everything in terms of our decision of where we're going."

The mobile WiMAX operator had $698 million in cash and short-term investments on hand Sept. 30 and has enough money to make the debt payment. Skipping the payment could raise concerns about the company's liquidity and whether or not it can stay out of bankruptcy court. Clearwire does have a 30-day grace period after the Dec. 1 deadline to make the payment.

Clearwire, in which Sprint owns a 54 percent stake, wants to build out a TD-LTE network and needs around $150 million to $300 million to maintain its legacy WiMAX network. Earlier this month, Clearwire CEO Erik Prusch said "there remains a gap" between Clearwire and Sprint, but he said he hopes the companies will be able to reach an agreement on possible funding and network roaming.

Sprint recently disclosed a non-binding agreement between Sprint and Clearwire that will cover the design of Clearwire's planned LTE network, but has yet to fork over any money. In fact, the company went out of its way back in October to exclude Clearwire from its LTE plans, opting to deploy LTE in its 1900 MHz spectrum and other bands as capacity becomes available. During an investor conference last month, Sprint CEO Dan Hesse seemed at ease with Clearwire edging into bankruptcy, declaring that no bankrupt wireless company has ever shut down its network and that it was Clearwire's responsibility to re-engage with Sprint-not the other way around.

Skipping the debt payment may be Clearwire's method of engagement. Defaulting on an interest payment falls short of disrupting Sprint's customers but sends Sprint a message. In an article in Forbes, Joan Lappin, CFA at Gramercy Capital Management, said Clearwire can choose to simply not make the payment on Dec. 1. When the 30-day grace period ends, it is in default and a bankruptcy proceeding begins. Lappin said many of Clearwire's bondholders feel confident about the fact that Clearwire's spectrum is valued at a premium and therefore will receive the full payment of their bonds. There may even be enough money left over to pay back shareholders.

Lappin believes Sprint will be left out in the cold if Clearwire's spectrum become bankruptcy collateral because it effectively transferred ownership of the spectrum to Clearwire, and Sprint is low on the priority list as a bond holder since it holds less than 5 percent of the debt outstanding, Lappin said. 

From past comments, Sprint apparently believes it has a shot of getting its 2.5 GHz assets back in bankruptcy proceedings. We will see how confident Sprint remains.

For more:
- read this Forbes article
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this Reuters article

Related articles:
Sprint's LTE plans reveal high-stakes leverage game with Clearwire
Sprint raises $4B in debt offering, hints at Clearwire funding
Clearwire CEO: 'There remains a gap' between Clearwire and Sprint
Clearwire inks wholesale deal with NetZero Internet provider
Clearwire ditches postpaid service, offers prepaid unlimited at $50
Clearwire to deploy LTE - if it can get additional funding