While most of the victims of last year’s telecom Armageddon have seemed to go under with amazing speed, XO Communications Inc.’s (OTC: XOXO) death has been a long and slow one. After flirting with bankruptcy for more than seven months, the company filed for chapter 11 this morning (see XO Files Chapter 11).

The Reston, Va., company had been hoping to negotiate a restructuring agreement with its creditors before filing a prepackaged bankruptcy plan, but after several attempts at reaching deals with different parties, the cash-strapped company finally took the plunge today.

Loaded down with $8.5 billion in debt and with a stock that once traded at more than $60 a share now going for less than a nickel, XO follows a long line of service providers that have filed for bankruptcy over the last year. That list includes companies like 360networks Inc., Global Crossing Ltd. (NYSE: GX), KPNQwest NV (Nasdaq/Amsterdam: KQIP), McLeodUSA Inc. (Nasdaq: MCLD), Metromedia Fiber Network Inc.(MFN) (Nasdaq: MFNX), and Williams Communications Group (NYSE: WCG) (see KPNQwest's Midnight Hour , MFN Falls Into Chapter 11, GlobalX: The Burst Bubble, and Williams Goes Into Chapter 11).

“This is just an outcome of a change of investor philosophy,” says Guzman & Company analyst Patrick Comack. “The industry turned its back on money-losing businesses.”

In today’s filing, XO listed $8.7 billion in assets and claimed to have had approximately $555 million in cash at the end of April.

Less than two years ago, XO, formerly Nextlink, was proclaimed by many observers to be one of the most likely service providers to survive the crunch. That aspiration started crumbling last November when the company announced that it would attempt to restructure its balance sheet with the help of a juicy injection of $800 million in cash from notorious buyout firm Forstmann Little & Co. and Mexican telecom giant Telefonos de Mexico. In exchange, the two companies were each asking for a 39 percent stake in the company. Forstmann had already invested $1.5 billion in XO.

The Forstmann/Telefonos deal, which was signed in January, was quickly challenged by the company’s largest bondholder, financier Carl Icahn, who proposed to hand over $550 million in cash for a 55 percent stake in the company (see Distressed Telecom Assets Pile Up).

"The Icahn investment shows that this one [unlike many other struggling telecoms] smelt and looked correct,” says Frank Dzubeck of Communications Network Architects, which has been an XO customer for several years. “This is a viable entity.”

That tug-of-war, however, seems to be ending with both parties simply dropping the rope. Icahn pulled his offer several weeks ago when he couldn’t reach an agreement with XO's creditors, and Forstmann/Telefonos announced that they wanted out of their deal last week, among other things because of the sharp decline in the value of XO since their negotiations started.

The fact that two major buyout firms are backing away from XO is a good thing, according to Davenport & Co. analyst F. Drake Johnstone. “The buyout firms have more exposure than the banks,” he says. “They realized that they were piling debt on top of debt… It was just throwing good money after bad.”

Although XO has stated that it has no intention of letting Fortsmann/Telefonos off the hook, the company said today that it is also considering an alternative standalone plan in which its bank creditors, led by Toronto-Dominion Bank, would be responsible for financing the restructuring. According to the plan, the $1 billion XO owes its bank creditors would be converted into common equity and $500 million of pay-in-kind secured debt (see XO Won't Drop Stock Agreement).

While some observers say that XO is likely to make it through bankruptcy, and reemerge as a profitable business, others say it would be better for the industry if it didn’t. “The telecom industry needs companies to go out of business and not to reemerge,” says Johnstone.

Banks are not the only ones that stand to lose at least part of their investment in the bankrupt telecom. The company’s founder and largest shareholder, Craig O. McCaw, has seen his entire 31.4 percent stake in the company disappear.

Who else is hurt by the bankruptcy? Other struggling carriers, like Qwest Communications International Inc. (NYSE: Q), WorldCom Inc. (Nasdaq: WCOM), and Williams Communications, along with equipment vendors like Nortel Networks Corp. (NYSE/Toronto: NT), Lucent Technologies Inc. (NYSE: LU), and Cisco Systems Inc. (Nasdaq: CSCO) are featured on the list of XO's unsecured creditors. Observers say that, while the carriers probably don’t have to worry about their investments just yet, since no one is likely to pull the plug on XO's services in the near future, the equipment vendors stand to lose any money they put into the company as vendor financing.

"XO Communications is a customer,” say Nortel spokesperson Tina Warren, “however, we currently have no significant financial exposure.” According to XO's bankruptcy filing today, the company had nearly $5 million in unsecured debt with Nortel at the end of April.

In today’s statement, XO said that the bankruptcy filing is limited to the parent company XO Communications, and should not affect any of the company’s operating subsidiaries. It also stated that it does not expect any layoffs or facility shutdowns in the wake of the filing.

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com