Sprint

(FON)

got soaked Friday as Wall Street worried once again that its cash supply is about to dry up.

Just a week after stressing that it has plenty of cash on hand, the big phone company was forced to reassure jittery traders Friday afternoon, after rumors to the contrary knocked 25% off the stock in heavy trading. The pressure eased only slightly after the company insisted once again that it's got enough money to get through the year, trading off 22% at $7.

The action points to rising anxiety among telecom investors that the sector's continuing deterioration, best illustrated by

WorldCom's

collapse last week, will force other cash-strapped, debt-laden companies into bankruptcy. Though Sprint recovered a bit after the midafternoon press release, investors continued to fret that Sprint might not be able to come to terms with its banks and that its plans to sell its phonebooks business might fail to bring in enough bucks to keep the company going.

Prague Spring

Sprint has been the target of persistent liquidity worries since spring, when concerns that it would be shut out of the low-cost commercial paper market forced it to put up its directory business as collateral on a $1 billion credit line. Friday's rumors centered on the ongoing negotiations over a new credit line the company is seeking. It hopes to replace a $3 billion bank line that expires next month.

In its statement Friday, Sprint said it has no cash-flow problems and that its plan to sell its directory business is progressing. The company said it is likely to decide on a buyer by the end of August, suggesting Sprint is making progress toward a deal that could bring it a hunk of desperately needed fresh cash.

But investors aren't won over so easily in this long summer of cash crunches and debt-load brownouts. Regardless of Sprint's claim that its cash on hand far outweighs its projected cash needs for the second half of the year, sentiment remained markedly negative on the stock amid worries that the company's banks may be exacting stiff terms in any negotiations on the credit lines.

"The banks have lost a lot of money in telecom lately," says CIBC World Markets analyst Tim Horan, who has a hold rating on Sprint. CIBC has no underwriting ties to Sprint. And with telecom companies largely shut out of the capital markets by their weakening stock and bond prices, the banks hold the strings in terms of continued funding.

Confidence Ebbs

Investors have been particularly skittish about telecom stocks in the wake of WorldCom's accounting scandal and subsequent collapse. With sales continuing to dip and financing getting tight, many in the market fear a collapse contagion.

Among the rumors involving Sprint on Friday was the suggestion that the company would have to draw down its credit line because banks were unwilling to renew. Another rumor had it that Sprint needed to offer more assets as collateral to obtain the new credit line.

The speculation fueled a heavy selloff of Sprint stock and contributed to a drop in its bonds. Bids on Sprint bonds fell 15 points to 50 cents on the dollar, generally the level that suggests a company is increasingly likely to default on its debts.

"The company has had ongoing liquidity issues and their guidance was a little high," says CIBC's Horan.

Still, Sprint last week downplayed the idea that cash pressures may force it to sell its yellow pages business for less than it originally anticipated. Sources familiar with the discussion say the sale is moving ahead. The company had hoped to entertain offers of $2.5 billion or more, but a person familiar with the company hinted that the price could fall well below that.

Sprint said last week during its second-quarter earnings call that it needs about $550 million to fund its operations for the remainder of the year. But with only slightly more than that in cash available, the company will be hard pressed to bring in enough cash from sales to cover expenses. The company also has an additional $2 billion credit line available that expires in a year.

Chances are, says one observer, Sprint is having to play a little hardball with some recalcitrant banks to get them to agree to a new credit line.