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High Noon for Clearwire's Debt Payment: Who Blinked?

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Shhh... hear that sound? That's the clock ticking off the seconds on Clearwire's (Nasdaq: CLWR  ) future. The company has until 5 p.m. today to pay the $237 million it owes in interest on its $4 billion of debt.

Wait a second, the ticking just stopped! Clearwire made the payment. We can all breathe a sigh of relief. End of story... or is it? Why were we all waiting in suspense anyway?

The plot
Clearwire CEO Erik Prusch shook up the telecom world two weeks ago when he told The Wall Street Journal the company was considering not making that payment. "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," he said.

But Clearwire did have the money to make that payment -- at least according to its latest SEC filings -- almost $700 million in cash and cash equivalents. So the big question is, why threaten to miss a critical deadline like this?

One theory making the rounds is that this was a game of chicken that Clearwire was playing with its main wholesale networking customer (a substantial owner of Clearwire's equity), Sprint Nextel (NYSE: S  ) . Clearwire needed a contract extension with Sprint that goes beyond 2012 just to stay alive. One analyst, Ping Zhao of CreditSights, told Bloomberg that Clearwire may have been threatening default to pressure Sprint into a new agreement.

Best friends forever?
Sprint was the first wireless carrier to claim 4G capabilities and has been using Clearwire as its 4G WiMAX network provider. The problem is WiMAX is a much slower technology than LTE, which Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) have already deployed in their 4G networks. Clearwire has said it needs almost $1 billion to upgrade its network to LTE specs and to maintain its current equipment. But Sprint has seemed loath to bail out Clearwire even as they seem so dependent on each other.

If it was a ploy, it seems to have worked. Sprint and Clearwire announced today agreements that will make it possible for Clearwire to go ahead on an LTE buildout. The new deals will provide Clearwire with over $900 million, with two-thirds of that paid in 2012, for continued WiMAX network service through 2013. Total funding will reach $1.6 billion.

And so Clearwire then paid the interest.

What if?
But what would have happened if it hadn't?

If Clearwire didn't get that check to the debt trustees' office by 5 o'clock, the world wouldn't end -- at least not right away. There is still a 30-day grace period to pay it off, but Standard & Poor's said in a statement that if Clearwire didn't pay up within five days, it would drop the company's rating to the bottom of the barrel with a D (for default) rating. S&P has already downgraded it to CCC-.

Crisis averted?
That disaster seems to have been avoided for now, but with these two companies, one can take nothing for granted. As analyst Ping Zhao pointed out, "Usually what's good for Clearwire is bad for Sprint."

In the past I have given Clearwire an underperform rating in CAPS. This news doesn't change that, but I will admit that it does bring some hope.

Keep an eye on Clearwire and Sprint by adding them to 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 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.

Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 01, 2011, at 10:58 PM, MattC69 wrote:

    What with all the CLWR-bashing this site has done / does, dressed up as undergraduate "analysis" I can't attach any weight to what your rating is on CLWR or anything else bud...

  • Report this Comment On December 02, 2011, at 7:29 AM, XMFDRadovsky wrote:


    Thank you for your comment, but "CLWR-bashing" implies that I am bludgeoning Clearwire with false criticism. That is just not the case.

    I did not make any of the above up and, frankly, I don't think I could.

    As for my rating, it is my belief that Clearwire will have to make it over several more hurdles before I could consider giving it an "outperform" rating.

    Betting on the company now would require a leap of faith that I am not prepared to make.

    That's my opinion based on the facts I see. Your opinion is different, but certainly just as valid.

    Thank you,


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