Sprint Bankruptcy Risks Are Rising: Bernstein

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Bernstein Research downgraded Sprint Nextel in a research note Monday, saying the telecommunications company’s risks of filing for bankruptcy protection are rising and will increase further as it releases its first 4G iPhone.

The report downgraded the company to “underperform” and set a $1.75 a share target price.

While the firm is not predicting a Sprint bankruptcy protection filing, it said the risk is both legitimate and increasing.

“Five year credit default swapsalready price in a roughly 50/50 probability of bankruptcy,” the report said. “We suspect that this implied probability of bankruptcy will come as a surprise to most equity investors.”

The company has $1.8 billion in debt maturities through the end of 2013 covered with cash on hand. While maturities in 2014 are also relatively modest, the company faces a sustained multiyear barrage of large debts that will have to be addressed, the report’s analyst said.

In 2015, Sprint has $2.6 billion in debt maturities due, while Clearwire, which is majority owned by Sprint, faces an additional $3 billion coming due in the same year.

“If Sprint’s performance is not substantially improved from current levels by that time, capital may not be made available for the refinancings,” Bernstein said.

If Sprint were to file for bankruptcy protection, its rivals could profit in the short run.

“A Sprint slide to bankruptcy, were one to occur, would temporarily benefit other players (, AT&T, and Verizon Communications), but could ultimately be a negative, as it could yield either increased regulation, or alternatively, a more aggressive post-bankruptcy Sprint with a clean(er) and leaner balance sheet,” the report said.

A next generation LTE iPhone poses new and larger risks for Sprint, because the company does not have sufficient free-and-clear spectrum to launch a competitive LTE network and lacks the money to clear spectrum that is already being used, Bernstein said.

“We expect Sprint’s competitiveness to begin to backslide when LTE becomes the nation’s de facto standard,” the report said.

Sprint’s shares fell on the report.

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Bernstein and/or its affiliates do and seek to do business with companies covered in its research publications. As a result, investors should be aware that Bernstein and/or its affiliates may have a conflict of interest that could affect the objectivity of this publication. Investors should consider this publication as only a single factor in making their investment decisions.



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