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Financial

360networks Restructuring Approved

After watching one carrier after another tumble into bankruptcy over the past year, it looks like the midnight hour of resurrections is about to begin.

360networks Inc. , which was one of the first large service providers to take the Chapter 11 plunge after the telecom bubble burst, has come a step closer to reemerging from bankruptcy (see 360networks Calls It Quits). Yesterday, the Justice David Tysoe of the British Columbia Supreme Court approved the company’s Canadian restructuring plan, after its Canadian creditors endorsed the plan last week. 360networks’ American creditors will get a chance to vote on the plan on September 24, and a confirmation hearing for the U.S. plan is expected to be held on October 1 (see Canada OKs 360networks Reorg).

Yesterday’s court approval of the plan came after Telus Corp. (NYSE: TU; Toronto: T) decided to back off its threat to force a new vote by the Canadian creditors, agreeing to make its $25 million claim during the U.S. court proceedings instead.

“We hit a little bump in the road with Telus,” says 360networks treasurer and vice president of finance Chris Mueller, insisting that Telus had no other choice but to agree to make its claim before the U.S. court, since its grievance was with one of 360networks’ U.S. companies. He says he doesn’t remember which company it was, but reveals that the claim pertains to a route purchased between Vancouver and Seattle.

That’s bad news for Telus. Mueller says that since 360networks has more unsecured creditors in the U.S. than in Canada, the company should have more leverage in its negotiations with Telus south of the boarder, and that Telus can forget recouping its full $25 million. “They’ll get somewhere between $1 and $25 million,” he says vaguely. If the claim isn’t settled, Telus will join the pool of 360networks’ unsecured creditors, which are set to get 12 percent of the equity in the new company. Telus didn’t return calls by press time.

Under the plan, the company’s secured creditors will convert most of their debt for about 80 percent ownership of the new company. Shareholders and holders of about $1.4 billion in unsecured bonds will get nothing under the plan.

360networks says it expects to reemerge from bankruptcy as a purely North-American telecom in late October. Before the company filed for Chapter 11 on June 28 last year, it had a backbone that stretched around the globe. Since then, it has written off the value of many of its assets, and all of its European assets have been liquidated in accordance with European bankruptcy law. The carrier is also close to a sale of its Atlantic sub-sea cable, according to Mueller. He admits, however, that the price the company will be getting for what was once considered a major asset will be far below the estimated $800 million original construction cost.

The company’s backbone isn’t the only thing that has shrunk since the bankruptcy filing. 360networks, which once had nearly 2,000 employees and about $3 billion in debt, will reemerge with about 450 employees and a mere $200 million debt load. The carrier claims it will have approximately $50 million in cash when it emerges from bankruptcy.

“Of the large wholesale fiber providers, we clearly have the lowest cost-structure,” Mueller says, insisting that the company should be cash-flow positive as soon as next year. “We’re in a good position to weather the storm.” He says that the company has been approached by several potential new customers that have been impressed by its cost structure.

But while scaling down operations is definitely a step in the right direction, some observers worry that it won’t be enough to save the carrier from another collapse. “Their underlying business plan is basically the same,” says i2 Partners LLC analyst Andrei Jezierski, who recently published a study titled "Telecom Distressed Assets: Bondholders Beware" (see Chapter 11 'Fix' is Doubtful). “I believe they still need to be quite a bit smaller, and have a different footprint. They may have made themselves smaller, but their shape is still the same.”

Mueller admits that the company will be following pretty much the same business plan as it did before filing for Chapter 11, although he does say it is trying to scale back on its reliance on dark fiber sales. Before the bankruptcy, dark fiber made up about 80 percent of the company’s business. “We’re going to be doing less and less of that,” Mueller says, claiming that infrastructure sales will make up about 50 percent of the company’s revenues when it emerges from bankruptcy, and that that number will steadily decline going forward (see Solution for the Fiber Glut: Turn It Off?).

Without dramatically changing its business model, however, Jezierski says it’s doubtful 360networks can reach positive cash flow next year, as Mueller claims it can. “That strikes me as a very ambitious claim,” he says. “It’s almost an unnecessarily aggressive goal.”

— Eugénie Larson, Reporter, Light Reading
www.lightreading.com
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