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Clearwire Debt Rating Lowered On Possible Missed Interest Payment
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The debt ratings at troubled US network operator, Clearwire have been lowered by Standard and Poors after the company revealed that it might miss a debt repayment deadline.
"The downgrade reflects our concerns that the company may choose to skip its $237 million of interest payments due on Dec. 1, 2011," explained Standard & Poor's credit analyst Allyn Arden.
Clearwire would have a 30-day grace period should it miss the interest payments on that date. With about $698 million of cash on the balance sheet, Clearwire has sufficient funds to pay the remaining interest expense due in 2011, although Standard & Poor's believes that it would still have to raise significant capital to maintain operations in 2012 despite the cost-reduction measures it has already achieved.
If Clearwire elected to make the interest payment, S&P believes that it would exit 2011 with around $350 million to $400 million in cash, which assumes less than $100 million of capital expenditures and EBITDA losses. They do not believe that this cash balance will be sufficient to cover free operating cash flow (FOCF) losses and a LTE wireless network overlay in 2012 and that the company will require additional funding during the year.
While its relationship with majority owner Sprint Nextel seems to have improved, the two companies have yet to announce an extension of their wholesale agreement, which could improve Clearwire's ability to obtain external funding from the capital markets.
Moreover, S&P expects that Sprint Nextel will both actively market the iPhone, which it believes is vital to growing its post-paid subscriber base, and de-emphasize its WiMAX enabled handsets. This, in turn, could impair wholesale subscriber growth at Clearwire and make it challenging to generate positive EBITDA or FOCF over the next year.
The ratings on Clearwire continue to reflect its highly leveraged financial risk profile based on our expectation that the company will likely fully deplete its cash in 2012. The ratings also reflect the view that Clearwire has a vulnerable business position as a developmental-stage company; significant competition from better capitalized wireless carriers, including AT&T Mobility and Verizon Wireless, which are deploying their own 4G wireless services; and technology risk.
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