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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.
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Belzebutt 12/4/2012 | 10:21:02 PM
re: Behind the Broadwing Meltdown Can someone explain the rules of these "bandwidth swaps"? Basically, is it just one carrier trading bandwidth with another carrier, and both recognizing this deal as revenue in their books? Could they also swap the same bandwidth back later and basically have double the revenues for nothing?

Was there any other factors in these deals which prevented them from being essentially "money for nothing"?

Let me know if I'm missing something...
konaboy 12/4/2012 | 10:21:01 PM
re: Behind the Broadwing Meltdown Let me clarify one thing. In no way am I accusing Broadwing of this immoral practise of upfront revenue recognition for a contrived bandwidth swap. I trust that their claim of proper ongoing revenue recognition for bandwidth swaps is true. I am merely pointing out the method by which some companies have abused the system.

KB
konaboy 12/4/2012 | 10:21:01 PM
re: Behind the Broadwing Meltdown Here's the downside to the bandwidth swapping extravaganza. All revenue for the entire term of the deal is recognized on the books instantly (good!). Outgoing monthly payments to each other are continued (and on the books) for the life of the IRU (Bad!). The associated incoming monthly revenue at each end of the deal has previously been counted (Really bad!). Basically they sell their soul to the devil in order to have growth in current year revenues.

Meanwhile, your stock is improving daily. You know it's unsustainable but you go back to the trading well for more anyway. Stock goes up again. Sell out high; get rich before anyone uncovers this GAPP gap! The rest of us get soaked with wallpaper that cost us $50 per sheet.

KB
Einstein2 12/4/2012 | 10:21:00 PM
re: Behind the Broadwing Meltdown the merit of these swaps is that you get a route you need and get rid of one that you don't need.

what i don't get is that, Qwest for example, had a conduit with 48 fibers; it lit 4 sold two, and had 44 dark. How could they ever think that buying a route from another company was worth $500 mil?

the accounting rules are not their fault. we all take advantage of loopholes in tax laws for example. the problem is they were not creating value, just making it look like revenue was increasing. i don't think it makes it more criminal that they did it at the end of the quarter. actually i think there's no merit to the argument that they did 'wrong'. they just followed the loophole.
rhynerapologist 12/4/2012 | 10:21:00 PM
re: Behind the Broadwing Meltdown It may not have been immoral, but it was stupid. The street is on the lookout for IRU swaps ever since it came to light how much revenue GlobalX, Level3, and Qwest booked from swaps.

I take it back, it is pretty immoral. But Broadwing wasn't as bad as others.
dodo 12/4/2012 | 10:20:50 PM
re: Behind the Broadwing Meltdown http://news.ft.com/ft/gx.cgi/f...

Belzebutt

This will edify you on what is legitimate swaps and not : check the glossary
zweisel 12/4/2012 | 10:20:50 PM
re: Behind the Broadwing Meltdown Sadly, regardless of who actually did these bandwidth swaps, the executives made personal millions while the average investor got soaked by being lied to by the analaysts (who missed this) and the executives who perpetrated these swaps.

No wonder the confidence in this industry as a whole has tanked. Ridiculous claims from startups, cheating GAAP, a insane bandwidth predictions... can you say dot.bomb d+¬ja vu?
Belzebutt 12/4/2012 | 10:20:49 PM
re: Behind the Broadwing Meltdown Thanks, great link.

By the way, zweisel, Lightwoman, did you notice how all our posts in Corvis-related threads instantly get ranked "1"? I'm sensing some resentment here. Please guys, I worked SO hard to get my Trumpet Major badge, you're really braking my heart, PLEASE stop.
Belzebutt 12/4/2012 | 10:20:47 PM
re: Behind the Broadwing Meltdown give yourself good marks!!

That's against my priciples though, it would be as unethical as, say, a CEO buying another company of which he's a major shareholder.
let-there-be-light 12/4/2012 | 10:20:47 PM
re: Behind the Broadwing Meltdown Belzy,

Moral of the story:

To become a Trumpet Major, be nice to Corvis (or give yourself good marks!!)
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