Sprint’s stock took a hit yesterday
after a prominent research firm downgraded the operator on a “very
legitimate risk” of bankruptcy, sending the operator’s shares down 4.5
percent after a recent rally.

Bernstein Research laid out two possible
outcomes for the company, which is juggling a major overhaul of its network and
the hugely expensive iPhone with a spectrum shortage and a significant amount
of debt.  

In the first scenario, Sprint
successfully upgrades its network, gets Clearwire on stable ground and is able
to offer LTE service on par with its competitors.  

In the second, “some combination of
its gargantuan take-or-pay contract with Apple, a hobbled 4G offering, and a
stupendous debt burden bring the company to its knees.” 

“To be clear, we are not predicting
a Sprint bankruptcy. We are merely acknowledging that it is a very legitimate risk,”
Bernstein Research analyst Craig Moffet, author of the report, said in a
research note. “And notwithstanding a recent rally in Sprint shares, we
believe that risk is rising.” 

A Sprint spokesman declined to comment
on the report. 

Sprint has less spectrum to deploy LTE
than its competitors, but has repeatedly insisted its speeds will be comparable
to those of AT&T and Verizon Wireless thanks in part to a capacity boost
from Clearwire’s yet-unbuilt TD-LTE network. 

But Moffet expressed doubt about Sprint’s
plan to use Clearwire’s TD-LTE network to supplement capacity. Clearwire’s TD-LTE
deployment will be limited, and combining Sprint’s FDD-LTE and Clearwire’s
TD-LTE could make it harder to secure devices that support both flavors of the
technology. 

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

Sprint’s LTE network and iPhone gamble need to pay off so it can make the
billions in debt payments coming due over the next three years.  

The operator should be able to handle
debt maturities totaling $3.2 billion through 2014, Moffet said, but
“thereafter the company faces a sustained multi-year barrage of large
maturities that will need to be addressed.”  

Clearwire, in which Sprint holds the
largest stake, has $3 billion in debt due in 2015, the same year Sprint has
another $2.6 billion due, Moffet said.  

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

The possible result: bankruptcy. 

Sprint could also find itself at a
significant disadvantage if Apple – with whom it’s paying $15.5 billion for the
iPhone – comes out with an LTE version of the hugely popular device, since
Sprint’s LTE deployment is behind competitors AT&T and Verizon Wireless.  

“We believe an LTE iPhone will
likely be badly disadvantaged on Sprint’s network, potentially impairing sales…
at a time when Sprint is subject to a punishing take-or-pay deal with Apple,”
Moffet said. Sprint has previously said it expects iPhone sales to surpass the
amount of devices it is committed to buy under its contract with Apple, but its
iPhone sales have been weaker than at Verizon and AT&T.

Sprint plans to have its LTE service up
and running in 10 markets before the middle of this year, but won’t start
selling devices that can get a boost in speed from Clearwire’s network until
sometime in 2013. Meanwhile, Verizon’s LTE footprint covers more than 200
cities and AT&T’s network will soon be live in about 40 markets.