Chapter 11: Good for Whom?

The MCI brouhaha is raising questions over why so many bankrupt carriers are given a second chance

August 5, 2003

4 Min Read
Chapter 11: Good for Whom?

Through the course of its recessionary downturn, the telecom industry has maintained a pretty solid track record of preserving ailing companies. Since the boom went bust, the roster of service providers that have made it successfully through Chapter 11 shows that economic absolution is available to a sizeable range of seekers (see Bankruptcy Boondoggle).

But the spirit of forgiveness may be reaching its limit. The case of MCI (Nasdaq: MCIT) has raised a clamor over whether a company's legal woes can force it to be sold for parts instead of resurrected, even if its plan is approved. In the latest flap, creditors and competitors are upping the pressure on the beleaguered carrier as it faces a stern sanction from the U.S. government (see Government Bans MCI).

All of this has put the whole U.S. bankruptcy process, as it relates to the telecom industry, under the spotlight. That's why Light Reading has dedicated its August Research Poll to the issue of whether MCI should be liquidated or resuscitated, from different perspectives. To give your own views and see what other readers think, click here.

Background: When companies file for Chapter 11 under the U.S. Bankruptcy Code, they are allowed to stay in business as long as a plan for reorganization is approved by a court with input from creditors. The reorg is intended to solve the company's financial problems.

If the reorg plan fails or there seems to be sufficient reason to think it will, creditors can petition the bankruptcy judge to sell the ailing company's assets and recoup some of their losses. The company itself also can move for liquidation. In either case, if the judge approves, the company files for Chapter 7 status under the code.

Alternatively, companies' assets can be purchased while they're in Chapter 11; in that case, the bankruptcy court must approve the sale to a new owner, but no Chapter 7 status is required.

Several industry forces say this routine isn't stringent enough. They say carriers should also be liable to automatically trip into Chapter 7 if they have proven records of fraud or corporate malfeasance.

The arguments from MCI's detractors are well known by this time: Despite arguments by the company that it's eradicated the source of the problems that forced it into bankruptcy, competitors and some shareholders say its reemergence would give it an unfair advantage over carriers that have stayed the course and kept their metaphorical noses clean (see MCI Settlement: What's Next? and Reports: It Began With Bernie).

Examples of recent Chapter 7 filings include broadband provider Network Plus Corp. In the past, others have been liquidated or sold while in the bankruptcy process, including satellite provider Iridium, NorthPoint Communications, PSInet, Star Telecommunications, Winstar, and Zephion, to name just a few.

In most cases, the assets of these firms wound up in the networks of competitors or other service providers. Cogent Communications Group Inc. (Amex: COI), for instance, bought a portion of PSInet (see Cogent Munches Midwestern ISP), and IDT Corp. doubled its domestic capacity with assets from Star (see IDT Gets Nationwide Fiber Network). Iridium's assets were used to establish a new company, Iridium Satellite LLC.

Overall, the number of telecom firms that are busted up appears to be fewer than a quarter of the total that file for Chapter 11, going by information from Nationwide Research & Consulting Inc. Since 2000, the firm figures, roughly 87 telecom carriers have gone into Chapter 11. Most of those are still in business. What's more, the number of telecom firms filing for bankruptcy has gone down: In 2000, seven filed; in 2001, 26; in 2002, 33; in 2003, so far, eight.

On the face of it, telecom providers seem to fare better than the general roster of firms when it comes to emerging from bankruptcy. According to the American Bankruptcy Institute, more than 70 percent of the firms that filed for bankruptcy nationwide in the first quarter of 2003 filed for liquidation; less than one percent filed for Chapter 11.

The relative success of telecom companies in getting out of hock isn't surprising; telecom worldwide is still viewed as a key market with a sizeable future that's undergoing temporary setbacks (see Workers Oppose H-1B Bill and VC Figures Hint at Upswing).

— Mary Jander, Senior Editor, Light Reading

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