Shares of Clearwire Corp (Kirkland, Wash., U.S.A.) plunged as much as 31% after a Wall Street Journal report quoted its CEO as saying the company was considering skipping a $237 million interest payment due December 1.
Shares of the cash-strapped high-speed wireless firm dropped as low as $1.28 as investors worried that their fears about bankruptcy could be realized. The stock regained some ground to close at $1.47, down 20%, on the Nasdaq.
Clearwire said it "does not comment on speculation" and declined to discuss the story.
Clearwire, which is majority owned by its largest customer Sprint Nextel Corp (Overland Park, Kan., U.S.A.), has been seeking almost $1 billion in funding to keep operating and to upgrade its network. The two companies, which have a rocky relationship, have been negotiating for an extension of their network agreement.
One analyst said that Clearwire's Chief Executive Officer Erik Prusch may have used the interview comments as a lever to try to force a new network agreement with Sprint, which uses Clearwire's wireless airwaves for its own services.
"I think they're using the interest payment as a negotiating tactic with Sprint," says Mizuho (New York) analyst Michael Nelson. "Sprint has the most to lose if Clearwire defaults on its debt and files for bankruptcy."
Clearwire had said earlier this month that it had enough cash on its balance sheet to meet the interest payment and keep operating for 12 months. But according to the Journal, Clearwire is not sure that paying up is in its best interests.
"It's a very expensive payment that we have," Chief Executive Erik Prusch told the Journal. "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."
Prusch also told the Journal that he has a number of advisers looking at strategic options but he declined to comment on whether the company would restructure its debt in or out of bankruptcy court, according to the story.
He told the paper that Clearwire would have a 30-day grace period should it fail to make the payment by December 1.
The comments likely mean that Clearwire is not making much progress in its efforts to secure funding, Mizuho's Nelson said.
"It's extremely risky. All sides are playing hardball right now," says Nelson, adding that Sprint would be at a disadvantage if Clearwire started negotiating with debtholders, who would be first in line to be repaid in a bankruptcy.
"It would really tighten the screws on Sprint to come up with an amicable solution before December 31," if Clearwater didn't pay, says Nelson. "They certainly have the option of not making the interest payment. Then they potentially default, unless they're able to negotiate a solution with their debtholders."
Investor fears for Clearwire heightened on October 7 when Sprint told investors at its analyst meeting that a Clearwire bankruptcy could be "constructive."
At the end of the third quarter Clearwire had about $4 billion in long-term debt and $711 million in cash and investments on its balance sheet.
Clearwire is looking to upgrade its network with a high-speed wireless technology known as LTE but it needs $600 million in financing to do that along with up to $300 million to fund its operations.
Sprint is also upgrading its own network with LTE, and has said it is looking to extend its agreement with Clearwire to include LTE.
While some analysts said Prusch's comments could suggest a higher likelihood of bankruptcy, others disagreed. Macquarie Capital analyst Kevin Smithen said Sprint would come to Clearwire's rescue and that he does not expect Clearwire to default.
"We expect that (Sprint) will inject $500-600 (million) into (Clearwire) by year-end at the latest in the form of a prepayment or loan," he says.
Sprint was not immediately available for comment.
(Reporting by Edwin Chan in Los Angeles and Sinead Carew in New York; editing by Gerald E. McCormick, Bernard Orr)