Clearwire Explores the Outer Banks of Market Access

Clearwire, the CCC- rated wireless broadband company founded by Craig McCaw and these days backed by Sprint, is strapped for cash and plans to raise $1.1 billion in debt. Most likely, with a massive interest rate attached.

Clearwire, the wireless broadband company founded by telecom entrepreneur and billionaire Craig McCaw, and Sprint Nextel are like two shipwrecked survivors stranded together on a lifeboat. They don’t like one another, you understand. But they are all that they have. They will survive or perish together--unless, of course, one party kills the other.

Sprint Nextel depends upon Clearwire as the backbone of its 4G wireless network, which is, as one might guess, appreciably faster than the industry’s prevailing 3G Standard. And Clearwire depends upon Sprint for customers, a sales channel and brand, and capital to help build out a nationwide network that could cost $4 billion.

Just last month it looked as if the lifeboat might go under in the churning seas of telecom. Clearwire issued a “going concern” letter that warned it may run out of cash. That rattled Sprint investors, who feared the company--already listing because its hold is filled with debt--would have to bailout Clearwire.

There was relief on December 2, when Clearwire announced it would issue $1.1 billion in debt, thereby refloating its balance sheet and supposedly letting Sprint off the hook.

This rescue occurred far, far from the mainland--exploring the outer banks of market access, as it were. Clearwire is rated CCC, and $500 million of the issue will include unsecured notes that can be repaid in cash or equity. Clearwire didn’t disclose its interest rate, but the Wall Street Journal notes the company paid 12.5 percent about a year ago.

To put that in perspective, consider that Ireland is rated AA- and pays about 6.7 percent on its government backed debt. Since Sprint might be considered an implicit guarantor of Clearwire debt, perhaps the comparison is apt.

What is more, Clearwire is the embodiment of business plan uncertainty. It has massive capital costs, big rivals in AT&T and

Verizon and a troubled partner in Sprint, whose CEO Dan Hesse quit the Clearwire board over Clearwire’s plan to market under its own name, essentially competing with its benefactor.

The risk profile for CCC-rated companies is off the chart. At the height of the financial crisis, they defaulted at a rate of about 40 percent.

Who would buy this deal? Well, in today’s environment, 12.5 percent is rare indeed. So, lots of people. You pay your money and you take your chances.

There is one potential investor who may have a special interest in the exchangeable notes. Holders of Clearwire stock represent 85 percent of the total voting power, with preemptive rights on the exchangeable notes, according to analyst Dave Novosel, of Gimme Credit. He says 31 percent have waived their rights, leaving 54 percent available to purchase the notes.

“By the way, Sprint happens to own 54 percent of the stock ... Hmmm, wonder who those holders might be,” Novesel said in a note. The Clearwire issue is notable because it is so expensive. In other words Sprint is determined to save Clearwire, even if it has to kill it. Thus, the companies are adrift, bound to live or die together, unless one eats the other first.

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