S&P Drops the Hammer on Clearwire

As noted in this story from yesterday, Clearwire's (Nasdaq: CLWR  ) CEO, Erik Prusch, created quite a kerfuffle last Friday when he told The Wall Street Journal his company was thinking about defaulting on its $237 million interest payment due Dec. 1.

Clearwire's shareholders obviously didn't like that announcement. The stock price fell off the cliff at 1:52 p.m. Friday, dropping almost 32% within 20 minutes. This caused trading to be halted several times. Clearwire ended up being down more than 21% for the day.

Bad credit where bad credit is due
One credit-ratings agency has also shown its waning confidence in the company as a result of Prusch's admission. Standard & Poor's Ratings Services downgraded Clearwire one step to CCC-, or very poor.

The company has not had a good year. Sprint Nextel (NYSE: S  ) , its 4G wireless networking partner, has kept Clearwire at arm's length while making plans to build another 4G network, one with LTE specs. Recently, the two companies have seemed to cozy up a bit, but it's more a friends-with-benefits relationship than something more lasting.

That lack of commitment on Sprint's part has contributed to the steady decline in Clearwire's share price over the past seven months, losing close to 75% of its market value.

Clearwire Corporation Stock Chart

Clearwire Corporation Stock Chart by YCharts

Clearwire seems to have enough cash to stay in business for the next year even if it does make that interest payment. But to hang around much longer than that, it needs to upgrade its network, and that, according to the company, will require close to $1 billion. That money is needed to build a 4G LTE network on top of its current 4G WiMAX network. Without that upgrade, it's unlikely it could compete with the likes of AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) with their speedy and growing LTE networks.

Even if Clearwire and Sprint can come to a viable understanding, that would not get Clearwire out of the woods. Sprint, too, has been the recipient of a recent credit downgrade. Earlier this month, S&P lowered Sprint's credit rating even deeper into junk-bond territory. And this came two months after Moody's did the same.

Higher loan costs
These downgrades will naturally result in higher interest rates for any borrowing, and there will need to be some borrowing. Sprint has $2.3 billion of debt due next March. Though it does have $4 billion available in liquid assets, the carrier will still need to raise enough to pay for its projected LTE upgrade, and -- if they can come to terms -- any bailout for Clearwire.

In the meantime, while we are waiting for the shoes to drop from the other credit-ratings agencies, keep track of these companies by placing them on your customized version of the Fool's My Watchlist:

Fool contributor Dan Radovsky owns shares of AT&T. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

Read/Post Comments (3) | Recommend This Article (1)

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  • Report this Comment On November 22, 2011, at 10:24 PM, conradsands wrote:

    Sprint is the only U.S. carrier to offer new and existing customers the iPhone experience with unlimited data plans starting at $79.99 per month. Sprint has been recognized as a J.D. Power 2011 Customer Service Champion — one of only 40 companies to have earned this distinction this year. To qualify for inclusion on this elite list, the companies must not only excel within their own industry, but also stand out among leading brands in 12 major industries evaluated by J.D. Power and Associates.

  • Report this Comment On November 22, 2011, at 10:25 PM, conradsands wrote:

    It's hard to fight the two bullies on the telecom block. According to the report “Corporate Taxpayers & Corporate Tax Dodgers 2008-10,” two of the 25 companies with the largest total tax subsidies were AT&T at #2 ($14.5 billion) and Verizon at #3 ($12.3 billion). Also, there were 30 corporations that paid less than nothing in aggregate federal income taxes over the same period. These 30 companies, whose pretax U.S. profits totaled $160 billion over the three years, included Verizon. The report states the laws that allow this were not enacted in a vacuum, but rather were adopted in response to relentless corporate lobbying, threats and campaign support.

  • Report this Comment On November 22, 2011, at 10:25 PM, conradsands wrote:

    Consumers are finally noticing that AT&T and Verizon = The Most Expensive Wireless Plans in America. We know where Verizon and AT&T (both in the top 5 for corporate lobbying) get all that money to run commercials 24x7, pay out huge “fat cat” executive bonuses and hire armies of lawyers and lobbyists to push the U.S. market into a wireless industry duopoly -- the American consumer. This is how AT&T and Verizon fashion themselves as brilliant … with their political use of money.

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