Wholesale Channel: Carrier’s Carriers Trim Debt in Reorganization Plans
Posted: 2/2002
Wholesale Channel
Carrier’s Carriers Trim Debt in Reorganization Plans
By
Josh Long
After holding its “Modified Dutch Auction” last fall, Level 3 abolished $1.713 billion in debt in exchange for $720.6 million in cash. In the process, the action exposed a financial reality that creditors funding big telecom providers find hard to digest: Many investors will be lucky to get half of their money back.
Telecom executives point out bondholders often purchase debt below face value on the public market, but, inevitably, there will be losers in the restructuring game. Unsecured creditors and equity shareholders will be among them.
The good news: Companies are trimming their long-term debt and interest payments. This mitigates the possibility that further declines in quarterly revenue could force them to seek Chapter 11 bankruptcy protection. Some network service operators even expect to see a profit within the next few years.
Williams Communications Group Inc. says it is poised to break even, reaching cash-flow positive, by the end of 2003. The carrier did not make as much noise over the development as its competitor Level 3 did, but the Tulsa, Okla.-based network services operator also bought its bonds last fall on the public market. It spent $236 million to retire $550 million in debt, representing 43 percent of the debt’s face value. The company anticipated reaching earnings before interest, taxes, depreciation and amortization (EBITDA) positive during the fourth quarter of 2001.
Global Crossing Ltd., saddled with $7.77 billion in debt and questions surrounding its long-term viability, had not announced a restructuring plan as of early December. A Global Crossing spokesman declined comment, but the recent restructuring maneuvers of its debt-laden competitors fuel speculation the network operator would take similar action soon.
Assuming Global Crossing tidies up its balance sheet, Merrill Lynch analysts questioned whether the Bermuda-based carrier would succeed in restoring confidence on Wall Street: “Even if the business were entirely recapitalized, we believe that raising margins (especially through improved cost controls) will be crucial for Global Crossing to create sustainable long-term value,” analysts stated last December in prepared remarks.
Meanwhile, bankrupt operator 360networks plans to make a recommendation to its creditors early this year. The Vancouver-based network services operator is considering all its options, including a stand-alone plan to continue operations in North America, 360networks spokeswoman Michelle Gagne said during a December interview. To buy more time to forge a restructuring arrangement, 360networks sought protection from its creditors with the courts for another six months.
Telecom companies have shied away from the network operator. In the first nine months of 2001, 360networks posted $48 million in revenue, a fraction of the $353 million reported for the same period in 2000. Executives attributed the steep decline in revenue to market conditions and customers’ reluctance to purchase commitments during the carrier’s restructuring.
The telecom industry’s so-called carrier’s carriers are not the only big-name telecom providers seeking to avoid the fate of 360networks, which filed last summer for protection from its creditors, after it ran out of money and missed an interest payment. Competitive local exchange carriers marketing to consumers and businesses led the retreat to the federal bankruptcy courts early last year. Those companies that expected to reemerge from Chapter 11 bankruptcy protection — many have called it quits and sold their network assets — anticipated swapping debt for equity and cash, effectively offering their creditors a few dimes for every dollar they invested.
Even competitive carriers perceived by analysts as the few bright spots in a market encumbered with high debt have announced reorganization plans to wipe out their liabilities.
XO Communications Inc. announced a restructuring plan Nov. 29 to swap equity for $800 million and clean up its balance sheet. The Reston, Va.-based carrier had retired approximately $1 billion in bonds for $288 million, even before it announced the reorganization plan.
Under the restructuring agreement, Forstmann Little, a current stakeholder with $1.5 billion in preferred stock, and Telefonos de Mexico S.A. de C.V., Mexico’s incumbent operator TELMEX, have agreed to inject $400 million each in exchange for equity in XO.
Forstmann Little and TELMEX would hold a 39 percent share in outstanding equity. This means current shareholders would lose the value in their investment. XO stopped making interest payments on its unsecured notes and preferred equity securities. Under the reorganization plan bondholders would receive about $200 million. XO would retain its obligation to pay its $1 billion senior secured bank debt.
Merrill Lynch estimates current bondholders would receive nine cents on the dollar in the form of cash and stock, eradicating $4.1 billion in long-term debt.
Creditors aren’t likely to be ecstatic over the proposal and investors’ potential disapproval could force XO to file for Chapter 11 bankruptcy protection. Under federal bankruptcy law, 50 percent of the company’s bondholders and creditors representing 67 percent of the total debt must approve a reorganization plan.
A few days after XO made headlines, Cedar Rapids, Iowa- based McLeodUSA Inc. announced similar plans to swap $2.9 billion in bonds for $560 million in cash and 14 percent in common stock.
The cash offer would be funded through the sale of the company’s telephone directory publishing business to Forstmann Little for $535 million. Forstmann Little also has agreed to invest $100 million in McLeodUSA.
The carrier anticipated completing the reorganization plan in the first or second quarter of 2002, but bondholders ultimately will have to accept the offer. An informal committee of bondholders has retained legal counsel and a financial advisor to assess the proposal. If bondholders were feeling cantankerous during the holidays into the New Year, McLeodUSA also may be forced to seek Chapter 11 bankruptcy protection.
Some network service operators even expect to see a profit within the next few years.
