Can Zenith Infotech Get Ahead of Bond Default Story?

Can Zenith Infotech Get Ahead of Bond Default Story?

Zenith Infotech faces another round of questions about its bond default. The Times of India suggests Zenith Infotech's bond defaults will be about $85 million, rather than the $33 million that had been originally reported. What's my opinion?

Zenith needs to implement proactive communications. The company was too silent the week of October 10, 2011. CEO Akash Saraf issued a statement around 4:00 p.m. eastern on Friday, October 14, 2011. The statement assured partners and customers that Zenith Infotech was solvent, strong and stable -- a strong statement. But Zenith shares had spiraled downward for multiple days while Zenith Infotech remained mostly silent the week of October 10, 2011.

What does all this mean to MSPs? First, let's slow down and look at the key parties involved:

1. Zenith Infotech: The company confirms that it defaulted on a bond payment and Zenith Infotech says it is now negotiating with bondholders to potentially develop a new payment plan. CEO Saraf says the company is solvent, strong and stable. I can't prove or disprove Saraf's statement but it is on-record and publicly available. For Zenith Infotech to fully eliminate speculation about the company's health, I believe Zenith Infotech must reach a new agreement with bondholders.

2. Zenith RMM: Zenith RMM -- a recent spin-off from Zenith Infotech -- is assuring customers that Zenith RMM is a separate company that is not associated with the bond default. But bondholders are pushing for a closer look at the Zenith Infotech-Zenith RMM spin-out deal, according to the Times of India.

3. Bondholders: Naturally, they want to be paid. Zenith Infotech says it is in negotiations to develop a new potential payment plan with the bondholders. But one of the major bondholders, the QVT hedge fund, alleges that they haven't heard from Zenith Infotech, according to the Times of India article. Side note: Generally speaking, I think it's natural for the bondholders to ask touch questions about Zenith Infotech's recent spin-out of Zenith RMM. If you were negotiating a debt deal with Acme, you'd want to know about Acme's other financial dealings.

4. MSPs: Some Zenith Infotech partners -- MSPs and customers -- are concerned about the bond default. MSPs have sent me about one to three emails a day since the bond default speculation started the week of October 10, 2011.I'm not hearing any panic among MSPs so let's all keep the situation in perspective: MSPs are wisely watching the situation. I consider this a fluid story that will generate regular updates as the Zenith Infotech-bondholder negotiations continue.

5. Rivals: Some rivals are trying to pour gasoline on the alleged fire. In some cases the questions and comments are relevant -- reminding MSPs to track the financial health of their technology partners. But in other cases, rivals are making allegations that they can't back up. So as you read the coverage across the web always double-check the sources. And ask yourself: Is the source credible? Do they have a potential conflict of interest?

6. Shareholders: Zenith Infotech's stock has fallen from a 52-week high of 271.95 to a recent 52-week low of about 79.75, according to data from the Bombay Stock Exchange. Let me state the obvious: The decline affirms that shareholders have been concerned about the debt default.

How will this story play out? I see two key potential steps:

First, Zenith Infotech needs to get ahead of the story by communicating far more regularly -- both with the media and apparently with bondholders, based on the Times of India story.

Second, Zenith Infotech needs to strike a new deal with the bondholders. CEO Akash Saraf has publicly stated that Zenith Infotech is financially solvent, strong and stable. But in the world of 24x7 communications, Twitter and the blogosphere, it's difficult for Saraf and Zenith Infotech to control the message. The best way to end the speculation is to reach a new bond payment agreement, assuming Zenith Infotech can do so.

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