English majors, rejoice: I have only a few more cliches left to describe the dire economic straits that both Sprint Nextel (NYS: S) and Clearwire (NAS: CLWR) constantly find themselves trying to escape. Unfortunately, though, I'll have to throw one more hackneyed phrase into their saga: "piling on."
That's what it may seem the credit ratings agencies are doing to both companies. As if they didn't have enough woes, Sprint and Clearwire will each have an even deeper ratings hole to climb out of if they want to survive.
The junk bond man cometh
Moody's Investors Service, a division of Moody's (NYS: MCO) , downgraded Sprint well below investment grade, from Ba3 ("Speculative Grade: Questionable") to B1 ("Speculative Grade: Poor"). This came about, in part, because of Moody's displeasure that Sprint isn't working with Clearwire to produce an upgraded 4G network together. By going it alone, Moody's indicated, Sprint will need between $6 billion and $8 billion by 2013 to build its own 4G network and pay off its debt as it matures.
Sprint blew it by not reaching a "win-win arrangement with Clearwire," according to Moody's.
As for Clearwire, Moody's downgraded it one notch to Caa2 ("Speculative Grade: Very Poor"), mainly for the likelihood that Sprint won't extending the present 4G agreement it has with Clearwire. As such, the company will have to find another partner or sell of its most valuable assets, its spectrum licenses, to pay its debt obligations after next year.
Standard & Poor's Ratings Services, a division of McGraw-Hill (NYS: MHP) , also jumped on the pile, last week threatening Sprint with a downgrade. It didn't like the increased debt load that Sprint would have to take on with its plans to accelerate its own network upgrade. It also wasn't crazy about the profitability hit Sprint will suffer with its agreement to sell Apple's (NAS: AAPL) iPhone.
These downgrades come at a vulnerable time for both companies. For Sprint, if it's not trying to stop the merger between AT&T (NYS: T) trying to figure out what to do with the unwieldy deal it made with LightSquared, whose proposed LTE 4G network is so embroiled in controversy, it may never get built.
For Clearwire, losing Sprint as its main wholesale customer will be a huge blow. It now has to raise enough money -- an estimated $600 million -- to add an LTE network to its slower WiMAX network in order to have any chance at all of staying alive. This downgrade from Moody's, which almost sounds the depths of junk-bond status, will only make any money-raising attempts more difficult and much more expensive.
Sprint Nextel and Clearwire would obviously be very speculative buys right now. Check out a list of five stocks that Motley Fool analysts picked for the Fool to buy for its own portfolio.
At the time this article was published Fool contributor Dan Radovsky owns shares of AT&T. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Moody's, Apple, and AT&T, creating a bull call spread position in Apple, and writing puts in Moody's. 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.
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