Updated from 5:22 p.m. EDT

The latest cash crunch may have permanently grounded Leap Wireless ( LWIN).

The embattled carrier's stock plunged precipitously today on news that it is likely to violate its debt covenants after an arbitration court ruled against the company. In afternoon trading, shares were tanking 31 cents, or 41.9%, to 43 cents; shares had touched intraday 52-week lows before recovering.

In a prepared statement, Leap said that based on an arbitration court ruling, the company will be paying 21 million shares to MCG PCS, priced at $1.894 a share, amounting to about $41 million. As a result, the company said it "will probably cause the company to fail to comply with, and to require waivers of, or amendments to, its vendor credit agreements in the near term," which could cause creditors to deem loans to be payable immediately.

In a last-ditch effort to remain above water, Leap has retained UBS Warburg to seek out new financing amid a company restructuring. "In light of the company's high level of debt and the restricted availability of the capital markets, we believe that hiring UBS Warburg and pursuing the alternatives available to us are in the best interest of the company and all of its stakeholders," said Leap Chairman and Chief Executive Officer Harvey P. White, in a prepared statement.

The developments appear to be the final chapter of the Leap saga, which remains one of the most glaring examples of the telecom meltdown's impact on the wireless carrier sector. The company is primarily known for its innovative pricing.

In a morning research note to investors, Johnson Rice & Co. wireless analyst John Bright reiterated the company's sell rating on the stock. "We do not believe any LWIN equity value will remain after restructuring," he wrote in a somber but curt statement that's becoming increasingly common as the telecom sector unwinds. "One scenario is that a strong-balance-sheet competitor acquires LWIN, but a slower growth wireless industry environment and focus on cash generation makes that scenario unlikely in time to preserve any equity value."

In a recent 10-Q filing, the company stated that its net debt reached nearly $2 billion, with $1.46 billion of that in vendor financing-related debt. Cash reserves stood at $217 million and $1.2 billion worth of property, plants and equipment. It also claimed an annualized revenue stream of about $600 million, based on second-quarter figures. At the end of the first quarter, it told investors the company needed to raise an additional $225 million and use $200 million to pay down vendor debts.

Currently, about 38 million common shares outstanding exist. But that will balloon to 59 million, after the new shares are issued to MCG. Because it does not plan to obtain shareholders' consent before issuing the shares, it faces potential delistment.

Companies that have engaged in vendor financing deals in exchange for equipment contract deals include Swedish wireless-equipment provider Ericsson ( ERICY).and U.S.-based equipment maker Qualcomm ( QCOM).

Putting Out Leap Fires

Ericsson moved quickly to put out the fires in its connections with Leap, saying its exposure was approximately $118 million (1.1 billion kronor) in senior secured customer financing, or about 4.2% of its gross exposure. In addition, Ericsson also said it has provided un-drawn financing commitments of about $365 million, or 13.6%, of all un-drawn financing. "The outcome of Leap's process is uncertain," according to an Ericsson prepared statement. "Ericsson intends to continue its close cooperation with Leap while protecting its outstanding exposure."

Separately, Qualcomm, another of Leap's vendor financers, also owns about 400,000 shares, with warrants to purchase another 3.4 million shares. In the June quarter, Qualcomm took a $194 million charge related to depreciation of its Leap shares.

Neither company's stock seemed much affected by Leap's woes today. Ericsson shares gained 9 cents, or 13.6%, to 75 cents. Qualcomm shares gained 73 cents, or 2.7%, to $28.04.

In one potential bright spot for the industry, analysts speculated about potential combinations Leap might offer amid a market driven toward consolidation. On the heels of rumors surrounding Cingular Wireless, AT&T Wireless ( AWE) and Deutsche Telekom ( DT)-owned VoiceStream, Leap has been identified as a potential good buy for spectrum-needy operators looking to expand its footprint. Leap operates a CDMA-based network and owns spectrum in 21 states and claims about 1.4 million subscribers, making it the country's 9th-largest carrier as of the spring. "In a restructuring, all options will be looked at, including a takeover or competitive bids for assets," said Bright, whose firm has not done underwriting for Leap.

Although at the outset its technology appears to be an attractive buy for Sprint PCS ( PCS) or Verizon Wireless, analysts said neither are desperate for spectrum. Instead, some suggested, they might be a good buy for a company that operates under a different technology with a stronger balance sheet and a need for spectrum. Rural telephone provider Alltel ( AT) was identified as a potential bidder, if Leap goes on the block.

In another scenario, some analysts pointed out that Cingular, despite operating different technology than Leap, might be interested in Leap. "If VoiceStream and Cingular don't get together, a fallback for Cingular would be to consider acquiring Leap," said Thomas Wiesel wireless services analyst Ned Zachar, who added that on a geographical spectrum basis, "Cingular had best lack of overlap with Leap ."

Leap, which operates a service under the Cricket brand, was one of the first wireless operators to offer a local all-you-can-talk plan, in a bid to convince potential subscribers to completely ditch their landline phones.

As originally published, this story contained an error. Please see Corrections and Clarifications.

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