Sprint Must Borrow With Bad Credit Rating

Just when Sprint Nextel (NYSE: S  ) needs money the most -- and the way it will have to get it is through borrowing -- Standard & Poor's downgraded the company's credit rating even further. It is now four notches below investment grade, into the highly speculative junk bond arena. This follows Moody's downgrade of Sprint last month into the same low-grade territory.

The reason for these downgrades:

Credit ratings blues
S&P credit analyst Allyn Arden said: "The downgrade reflects our belief that costs associated with Sprint Nextel's network modernization project and fourth-generation wireless deployment will result in near-term margin compression and higher capital spending."

Moody's, in particular, was miffed at Sprint's going it alone on a network upgrade. "Sprint has missed an opportunity to save billions of dollars of capex by failing to reach a win-win arrangement with Clearwire," said Moody's Senior Vice President Dennis Saputo. He also noted that these were "very aggressive build out targets for a company that has historically failed to realize the full benefits from previous major strategic initiatives."

Sprint, which has $2.3 billion of debt due next March, has available $4 billion of cash, cash equivalents, and short-term investments, and has $1 billion of as-yet undrawn credit. But the company will still need to borrow to pay down its debt, cover the costs of network upgrades, and maybe even bail out Clearwire if it decides to go that route for its 4G LTE network.

To do all that, Sprint announced Friday, it will float two bonds, a $1 billion, 10-year note paying 11.5%, and a seven-year note paying 9%. Nice interest rates for a lender -- if Sprint can stick around long enough to pay it all off.

Can Sprint get to the finish line in this three-legged race? Keep track of Sprint and Clearwire by putting them on My Watchlist.

Fool contributor Dan Radovsky has no financial stake in the above-mentioned companies. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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