Sprint Nextel Corp plans to offer debt in a private transaction and could use the proceeds to fund Clearwire Corp .

Sprint, whose credit rating was downgraded on Friday, also said it could use the proceeds to pay back existing debt or fund its network upgrade.

But that didn't stop Clearwire shares from rising as much as 28 percent, because Sprint had previously refused to discuss whether it would help Clearwire's current efforts to raise almost $1 billion in financing.

It provides a glimmer of hope. The fact they put it in there means that its under consideration despite Sprint's posturing at its analyst day, said Mizuho analyst Michael Nelson.

Sprint executives triggered a 32 percent drop in Clearwire's shares on October 7 when they told an investor conference Sprint would stop selling phones using Clearwire's current service at the end of 2012. They had also suggested that a Clearwire bankruptcy could be constructive.

The company had since said it was trying to negotiate an extension of its agreement with Clearwire but left lingering fears among investors.

Even after Friday's move, Clearwire's low share price indicated investor concern that it could still end up filing for bankruptcy, Mizuho's Nelson said. Standard & Poor's CCC+ rating of Clearwire also indicates a bankruptcy risk.

A Clearwire spokesman said that the company's focus is on increasing revenue and its customer base. He declined to comment further.

The company said earlier this week that it has enough money to fund its operations for the next 12 months.

The rating agency downgraded Sprint one notch to a B+ rating from a BB- rating on Friday but removed it from a Creditwatch Negative meaning that it is no longer under review for another downgrade.

Ratings downgrades tend to increase the cost of raising capital through debt markets.

Sprint did not say how much cash it was aiming to raise in the offer announced on Friday. It had said on October 26 that it could need to raise up to $7 billion in financing over the next few years as it looks to upgrade its network and pay for the high cost of its agreement with Apple Inc to sell iPhone.

Clearwire, which is majority owned by Sprint, is seeking up to $300 million to fund operations and about $600 million for a network upgrade that it urgently needs to help it compete with rivals and win wholesale customers other than Sprint.

It said earlier this week that the companies were in talks but that they had gaps due to differing strategic goals.

Sprint said it plans to offer notes due 2021 and 2018 and that the 2018 notes would be guaranteed by its wholly-owned subsidiaries that guarantee its existing credit agreements.

Sprint is Clearwire's biggest customer. By midday, Clearwire shares had lost some of their momentum but were still up 19 cents, or 11 percent, at $1.94 after touching $2.25 earlier in the Nasdaq session. Sprint shares were up 7 cents or 2.5 percent at $2.88 on New York Stock Exchange.

(Reporting by Sinead Carew; editing by Gerald E. McCormick and Derek Caney)

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