Behind the Broadwing Meltdown

It was a wild ride for Broadwing Inc.'s (NYSE: BRW) stock on the NYSE today, as shares plummeted to a 52-week low after Wall Street analysts issued uncharacteristically alarmist notes about the company’s large debt load and high cash-burn rates amid the general malaise in the telecom industry.

Broadwing was the second most actively traded stock on the NYSE, with 25.84 million shares changing hands. The stock dropped as low as $2.55 a share, down more than 50 percent from the previous day's closing price of $5.28, then slowly inched back to $3.70 a share by closing -- about 30 percent below yesterday's price. Over the past year, the company’s stock price has fallen more than 86 percent, from a high of $27.28 a share.

The cycle started when two financial analysis firms, Morgan Stanley Dean Witter & Co. and Merrill Lynch & Co. Inc., issued reports today raising questions about Broadwing’s viability. Surfacing nearly a week after the company issued its quarterly report with the Securities and Exchange Commission (SEC) last Wednesday, the reports raise questions about Broadwing's high debt load, currently $2.12 billion, and its ability to refinance upcoming debt maturities.

They also criticize the company’s approximately $2 million in revenue from capacity swaps for the first quarter of 2002, saying that such notorious IRU (indefeasible rights of use) deals could raise questions about management’s integrity. Analysts were especially concerned by a restructured contract with now-bankrupt PSINet Inc., which would allow Broadwing to recognize revenues from the IRU sales over a shorter period of time.

There was also concern on the market today over the company’s expected second-quarter goodwill and accounting charge of $1.2 billion to $1.8 billion, announced in its quarterly report last week, up from a previously forecasted $1 billion charge. The financial report also revealed that Broadwing had drawn down approximately $1.66 billion from its $1.93 billion credit facility, leaving only $263 million unused. With a current debt load of $2.12 billion, the company must pay creditors around $1.3 billion through 2004, according to reports.

As the stock price plummeted today, Broadwing scrambled. This afternoon, Broadwing chairman and CEO Rick Ellenberger issued a press release assuring investors and customers that the company’s credit facility and debt covenants are in good standing (see Broadwing Sets the Record Straight).

In the release, Ellenberger insisted that worries surrounding Broadwing’s financials were based on misunderstandings and rumors. “The company is in compliance with all covenants,” according to the statement. It also claims that the company has reduced its bank debt by 15 percent since the beginning of the year, and that it has reduced its cash burn for continuing operations and lowered its rate of borrowing.

In accordance with the company's annual report, filed with the SEC on March 31, Broadwing is planning to refinance a portion of its existing debt prior to or during 2003. This is a result of maturities within its existing bank credit facility, today’s statement explains.

Addressing concerns about the company’s $2.12 billion debt load, Ellenberger points out that Broadwing’s ration as of the end of the first quarter was 3.27 percent, well below the requirement of 4.75 percent.

The statement also addresses the issue of IRUs or capacity swaps, insisting that the company accounts for all IRUs in a manner that recognizes the revenue over the life of the agreement.

The company’s shares inched back up after the press release was issued.

Of course, ups and downs in the telecom market are nothing new. In fact, Broadwing rose to the top of a list of carriers with serious financial problems in "Carrier Crisis Report," which was published in March by Optical Oracle, Light Reading’s paid research service (see Carrier Crisis: Who's Most at Risk?).

— Eugénie Larson, Reporter, Byte and Switch
http://www.byteandswitch.com

Editor's Note: Light Reading is not affiliated with Oracle Corporation.