Clearwire Got Crushed: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Clearwire (NAS: CLWR) dropped 10% Friday on news that first began circulating late yesterday: Burdened by debt and with no free cash flow to pay for it, Clearwire may be forced to "restructure" its obligations.

So what: That doesn't sound so bad, now does it? Well ... it may not sound bad until you remember that "restructure" is actually a nice way of saying "default." Run a headline reading: "Clearwire is considering defaulting on its debt," and then see how people react.

Now what: The problem with asking for a "restructuring," though, is that it generally gives lenders the option of declaring you in default of your obligations -- which is itself a nice way of saying "insolvent," or even "bankrupt."

And folks, that's basically what Clearwire is today. Bankrupt -- or near enough to it. Oh, Clearwire's got cash in the bank all right -- $830 million, in fact. But it's not bringing any more in the door (to the contrary -- free cash flow for the past year ran to negative $2.7 billion), and it's got a $4.1 billion debt load that dwarfs its cash balance. Meanwhile, Clearwire needs to spend $600 million to upgrade its network.

Add Clearwire's "restructuring" talk to this already precarious position, and there you have it: A recipe for a 10% stock price decline.

Will the Clearwire story have a happy ending?Add it to your Watchlistand find out.

At the time this article was published Fool contributorRich Smithdoes not own (or short) any company named above. The Motley Fool has adisclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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