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Sprint Downgraded on Concerns over Clearwire Partnership

Moodys Investors Service, the credit ratings agency, on Thursday announced downgrading the corporate family rating for Sprint Nextel Corp., partly citing concerns over the companys relationship with Clearwire.

The credit ratings agency also raised concerns over a potential deterioration in Sprints credit profile as the nations third-largest mobile operator invests hefty sums to modernize its networks in order to offer competitive 4G services.

Moodys believes that Sprints plan to address the deficiencies in its dual networks will eventually achieve meaningful cost savings given the leap forward possible with currently available technology. However, we remain unconvinced that Clearwire will be able to bridge the gap and allow Sprint to continue offering a competitive 4G service until 2013 when Sprints upgrade nears completion,” Moodys stated. This skepticism is based on our views of Clearwires financial, technical and operational limitations, the relationship between the two companies and Sprints spectrum position excluding Clearwire.”

New York-based Moodys said the rating to a Ba3 from a Ba2 affects about $20 billion in debt and concludes its review of ratings on Sprint, which were initiated last November.

In a separate action Thursday, Moodys confirmed its Caa1 corporate family rating and Caa2 probability default rating for Clearwire Communications Corp. Credit ratings agencies such as Moody’s and Standard & Poor’s give ratings that assess a company’s ability to pay back its debt.

Moodys also lowered Clearwires speculative grade liquidity rating based on Clearwires high cash burn rate, the lack of a revolving credit facility and its inevitable need for incremental capital.”

Clearwire and Sprint on Tuesday announced resolving disputes over the prices Sprint pays Clearwire for access to its high-speed mobile network. Sprint, which owned a 54 percent stake in Clearwire as of Dec. 31, 2010, has agreed to pay the Kirkland, Wash.-based mobile operator a minimum of $1 billion during the next two years for fourth-generation, or 4G, wholesale services.

But Moodys noted that Sprints majority ownership and status as Clearwires largest customer demonstrates the lack of agility within the partnership.”

The sacrifices required to turn around the company following the Nextel acquisition and the disastrous structure of the Clearwire partnership have led to Sprints current predicament,” Moodys Senior Vice President Dennis Saputo said.

In a separate statement, Saputo said the wholesale pricing agreement doesnt solve all of Clearwires challenges. He noted that the lack of any further strategic development suggest that Sprint is unlikely to fund Clearwires operations, that Clearwire has minimal opportunity to sell spectrum at prices it deems palatable and that Sprint and Clearwire remain at arms-length with respect to their long term relationship.”

 

It is possible that Sprint would acquire Clearwire outright. But in a special report last month, Fitch Ratings said that possibility would decrease if the companies could not reach an agreement on a unified strategy for building a 4G network.

In Fitchs opinion, a failure by the two companies to strike a network sharing agreement and/or a 4G network expansion by Clearwire funded by a spectrum asset sale diminishes the likelihood that Sprint will acquire the company in the future,” Fitch Ratings analysts wrote.

Sprint, which served 49.9 million customers at the end of last year, is scheduled to release its first-quarter results on Thursday, April 28. Clearwire is set to release its earnings the following week on Wednesday, May 4.

Clearwire announced last month that several of its executives were leaving the company, including its chief executive, Bill Morrow, for personal reasons.” The company has named its chairman, John Stanton, as CEO on an interim basis.

Clearwire ended the fourth quarter of 2010 with roughly 4.4 million subscribers, including 1.1 million retail customers and 3.3 million wholesale customers through its relationships with Comcast, Sprint and Time Warner Cable.

The company said at the time it was examining a number of funding and other strategic alternatives, including potential strategy transactions, additional debt or equity financings and/or asset sales.” Clearwire has received offers to purchase excess spectrum that it holds, but the company said it is still evaluating whether to proceed with a sale.

Strategic investors in Clearwire include Intel Capital, Comcast, Sprint, Google, Time Warner Cable and Bright House Networks.


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