--Standard & Poor's downgrades SoftBank credit rating by 2 notches to "BB+"

--Junk rating could make it expensive if firm needs to issue more corporate bonds

--Shares end down 3.4% after downgrade

TOKYO--Standard & Poor's Ratings Services on Monday cut its long-term corporate credit rating on SoftBank Corp. (9984.TO) by two notches to junk, citing the large amount of debt the Japanese wireless carrier has taken on through its $21.6 billion purchase of Sprint Nextel Corp. (S).

The downgrade to a "BB+" rating, which came a day before the Sprint deal is expected to close, means that SoftBank could face big financing costs if its ambitious plans to turn around Sprint hit any kind of roadblock and it needs to raise cash through corporate bonds.

S&P listed in a report SoftBank's increased debt and financial burden and Sprint's "weak free cash flow generation and high debt ratios" as reasons for its downgrade. "Sprint Nextel's exposure to intense competition in the U.S. market.. is unlikely to subside substantially in the next two to three years," the rating company also said.

To finance the massive acquisition, SoftBank secured a bridge loan of Y1.035 trillion ($10.2 billion) in December and has since announced a bond issuance whose upper limits total roughly Y1.09 trillion. The rest of the financing comes from SoftBank's cash holdings.

Using the funds SoftBank is providing, the U.S. wireless carrier plans to more than double its pace of capital spending over the next two years to a total $16 billion to build out its network. It also plans to negotiate big discounts with suppliers for smartphones and network base stations by ordering for both the U.S. and Japan markets.

Armed with competitive prices and Sprint-controlled wireless company Clearwire Corp.'s (CLWR) spectrum, which would support high-speed connectivity in urban areas, SoftBank-Sprint hopes to win subscribers from heavyweights Verizon Wireless and AT&T Inc (T).

"We can't do anything interesting unless we are No. 1," SoftBank CEO Masayoshi Son told shareholders last month.

But the gap that Sprint must close is large. Sprint's 4G LTE network covers 88 markets across the U.S., far smaller than Verizon's 491 markets. Nor is Mr. Son chasing a static target. Both Verizon Wireless and AT&T have also been referring to themselves as "global carriers," suggesting that they too have an eye on becoming the top global wireless carrier.

Now that the Federal Communications Commission has voted in favor of SoftBank's acquisition of Sprint and Sprint's plan to buy out the Clearwire stake that it does not already own, the race is on for U.S. carriers to buy more spectrum, analysts say.

"Everyone is talking to everyone and nothing is off the table," Macquarie Capital analyst Kevin Smithen wrote in a report to investors last week. Over the past two years, AT&T has been reported to be in talks with Dish Network Cable (DISH), Time Warner Cable Inc. (TWC), and Telefonica in Brazil (VIVT4.BR), while Verizon has been reported to be talks with Wind Mobile S.A. (WMO.WA).

After the Standard & Poor's statement, five-year credit default swaps on SoftBank widened by 20 bps to 210 bps, a CDS trader at a major bank in Tokyo said.

"We knew S&P would downgrade SoftBank once regulatory approvals were granted, but a two-notch cut was a surprise," he added.

Moody's Investors Service has also cited its concern that a Sprint acquisition could weaken SoftBank's finances.

In share trading in Tokyo Monday, the announcement of the downgrade mid-afternoon had an immediate impact on the company's stock. SoftBank's shares closed down 3.4% at Y5,680 despite finishing the morning session off 0.2%.

"The rating cut was clearly deeper than expected, and it took SoftBank to well under investment grade," Monex market analyst Toshiyuki Kanayama said. "But the selling may only be limited to today, or at worst, a few days, since the firm's big takeover deal has now been given regulatory approval," he also said.

(Kosaku Narioka and Brad Frischkorn contributed to this report.)

Write to Mayumi Negishi at Mayumi.Negishi@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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