Backbone Providers: Strapped And Tapped

Bailouts, asset liquidation, and bankruptcy protection replace acquisitions, network buildouts, and fiber optic upgrades as key business strategies for network operators in 2002.

by ISP-Planet Staff [January 30, 2002]

Bankrupt backbone carrier PSINet Inc. (OTC:PSIXE) has completed the sale of all of the outstanding shares of PSINet Japan Inc. to Cable & Wireless IDC, Inc., for $16.6 million plus assumption of liabilities. When PSINet first announced the deal last month, the Ashburn, Virginia-based company said the selling price was $10.2 million.

The increase in the price results from Cable & Wireless bidding against another party at the court supervised auction process that forms part of the sale process under Chapter 11 of the U.S. Bankruptcy Code.

PSINet Japan provides IP connectivity and web hosting services for enterprise customers in Japan. The company has points of presence within key Japanese cities, a data center in Tokyo and provides services to several thousand businesses.

In June, claiming total liabilities of $4.3 billion, PSINet, the pioneering wholesale Internet service provider that went on an aggressive acquisition binge over the last four years, filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. Included in the filing were 24 PSINet operating subsidiaries in the U.S.

At the time of the filing, the Ashburn, Va.-based PSINet had total assets of $2.2 billion. Of the $4.3 billion in liabilities, $2.9 billion was bond debt. The companies involved in the filings had approximately $300 million of unrestricted cash, cash equivalents, short-term investments and marketable securities on hand. The company believed this cash balance would provide sufficient financial resources to fully fund operations during the anticipated restructuring period.

PSINet is a provider of Internet and IT solutions offering hosting solutions and a full suite of Internet services through wholly owned PSINet subsidiaries.

Global Crossing crosses over
Global Crossing (NYSE:GX), a worldwide voice and data carrier for telecom companies around the world, filed for Chapter 11 bankruptcy protection this week.

Operations will continue as normal, thanks to a $750 million cash investment from two firms, Hutchison Whampoa Limited and Singapore Technologies Telmedia Pte, Ltd., which should go a long way to reassuring its fiber optic customers and investors.

John Legere, Global Crossing chief executive officer, rushed to reassure those individuals with a statement released earlier this week.

"Ours is a balance sheet issue, not an operational one," he said, "Today's actions are intended to directly address this issue. Even with the financial uncertainty we've recently experienced, customers have continued to choose our network over many others. With this restructuring, we'll put financial uncertainty behind us and the power of our network will once again become the primary factor in the minds of our customers."

The bailout comes at a cost for Global Crossing: the $750 million deal gives the two companies equity interest in the company, though how much of a stake they have in the company is uncertain at this time.

Darren Jacobs, director of TFS Telecom, a New York-based telecom risk management and brokerage company, said the Chapter 11 filing is symptomatic of the troubles facing all carrier's who provide lines for telcos one that won't be cleared up anytime soon.

"Building assets to be a carrier's carrier continues to prove a non-viable business model at this juncture," he said. "While we have been waiting for the killer application, the dot-com era boomed and busted, and with it the expected demand that every next-generation carrier providing long haul capacity had built in anticipation of.

"Further complicating matters is the issue of the last mile," he continued. "Often times, the cost of the local loop is prohibitive and exceeds the cost of the long-haul. The industry will shake out and consolidate further, eventually lending it to a smaller number of providers and eventual price stability. The question with no clear answer is when."

Both investing companies already have a deep commitment with Global Crossing, with ties that find its roots in Asia, where Global Crossing has a major stake in the region.

Battered, Globix aims to reduce debt burden
Also this week, the beleaguered backbone operator Globix Corp. reached a bankruptcy deal with bondholders. The company said it would file for Chapter 11 bankruptcy protection next month after more than half of its bondholders agreed to restructure $600 million of debt.

Officials at Globix indicated it had organized a prepackaged bankruptcy with a committee representing holders of about 51 percent of Globix's $600 million of 12-1/2 percent senior notes.

Globix Chief Executive Peter Herzig told Reuters the aim is to reduce the company's debt burden by $480 million and save it $75 million in annual interest payments.

"The fact that we've got the majority already in hand is a very good sign for us,'' Herzig told Reuters. "We're very confident we're going to get the remainder.''

Globix now needs two-thirds of bondholders to vote in favor of the plan. It said institutional funds dominate its bondholder pool. It also said it has 30 days to seek consents to its plan from additional bondholders.

The New York-based carrier-class network operator suffered from falling revenues, growing losses and a recent credit downgrade by Standard & Poor's. The company voluntarily delisted itself from the Nasdaq stock exchange after announcing its restructuring plans.

McLeod vaporized, XO in Mexico
Meanwhile, McLeodUSA Inc. and XO Communications Inc., while not in bankruptcy, are completing restructurings that potentially leave bondholders with nothing but pennies on the dollar.

Last week Britain-based Yell Group, the former directories arm of BT Group Plc, agreed to a $500 million deal to finance most of its planned purchase of the McLeodUSA Publishing Company.

The company, whose directories include Yellow Pages and Talking Pages, said he funding was being arranged by CIBC World Markets Plc and Credit Suisse First Boston.

A Yell spokesperson said $250 million would be raised in bank debt, and another $250 million through an offering of high-yield notes.

With its profitable "yellow pages" publishing division sold, McLeodUSA next announced that the company has completed the previously announced sale of certain of its Internet/data assets and wholesale dial-up ISP customer base (formerly part of Splitrock Services) to Level 3 Communications, Inc.

Under terms of the agreement, which were substantially the same as previously announced, Level 3 purchased 350 points-of-presence across the U.S., the related facilities, equipment and underlying circuits, plus the wholesale ISP customer base. McLeodUSA will retain its Level 3 fiber IRU. The parties have also entered into operating agreements enabling McLeodUSA to continue providing service and support to its in-region customers.

McLeodUSA also announced that it has completed the sale of its customer-premise equipment company, Integrated Business Systems to Inter-Tel Technologies, Inc. Terms and conditions were not disclosed.

McLeodUSA once provided integrated communications services, including local services, in 25 Midwest, Southwest, Northwest and Rocky Mountain states. Now, the company doesn't appear to provide mcuh of anything anymore.

For it's part, Virginia-based XO Communications said it has reached a definitive agreement with Forstmann Little & Co. and Télefonos de México S.A. de C.V. (TELMEX) on the terms of their previously announced intention to invest $400 million each in XO in exchange for new equity in the company.

The agreement is subject to a number of conditions, including XO successfully completing a restructuring of its existing balance sheet and receipt of regulatory approvals. The company is in discussions with the institutions that are lenders under its secured credit facility regarding modifications to that facility and with representatives of the holders of its senior notes regarding a restructuring of that debt, all in an effort to reach terms with those creditors that satisfy the restructuring requirements contemplated by the definitive agreement with Forstmann Little and TELMEX.

XO also announced it has reached a forbearance agreement with the lenders under its secured credit facility in which the lenders have agreed, subject to certain conditions, not to exercise their remedies under the credit facility with respect to certain cross default events and to the covenant in the credit facility relating to XO's fourth quarter minimum revenues. The agreement contemplates that the lenders' forbearance will continue until April 15, 2002 in order to provide the company with an opportunity to reach agreement with its creditors regarding the terms of the proposed balance sheet restructuring.

XO Communications used to be one of the nation's fastest growing providers of broadband communications services offering a complete portfolio of Inter-net-based communications services.

While the U.S. economy may be in a slump, at least Mexico's blue-chip companies are still flexing their buying muscle abroad. The Telmex deal finalizes its 39 percent stake in XO. Whether the capital infusion is the equivalence of the kiss of lfe for XO remains to be seen.

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