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KPNQwest announced today that both its debt and its equity securities may be worthless. Bankruptcy could be looming
May 15, 2002
European telecom company KPNQwest NV (Nasdaq/Amsterdam: KQIP) saw its stock price plummet to a new low today after it announced that its liquidity situation had further deteriorated (see KPNQwest 'Exploring Options').
In midday trading, KPNQwest's stock dropped nearly 60 percent, trading at 43 cents a share. Its bonds were trading at a mere 6 cents on the dollar this morning.
While today’s announcement seems to have sent shockwaves through the market, it shouldn’t have come as much of a surprise. It was just three weeks ago that the company announced it was lowering its 2002 earnings forecast by more than 20 percent, from €1.3 billion (US$1.18 billion) to €1.05 billion ($957 million).
But today’s announcement underlined the severity of the situation. The Netherlands-based company, which is weighed down by an approximately €2.3 billion ($2.09 billion) debt load, revealed that its liquidity position had continued to deteriorate since its April 24 announcement. It has hired Bank of America Corporation and Bear Stearns & Co. Inc. to help with the reorganization of its balance sheet. The company has approached shareholders and third parties in attempts to find buyers for some of its non-strategic assets. However, no such buyers have surfaced yet.
“We are working with our advisors to look at all types of scenarios,” Piers Schreiber, a company spokesperson said today in response to the question of whether KPNQwest might soon be filing for bankruptcy. He says there are a lot of stakeholders to take into consideration.
If KPNQwest isn’t able to scramble together buyers or investors in an already hard-hit market, it probably will have no other choice than to file for bankruptcy. While the company has entered into discussions with the lenders under its existing credit facility, in the current situation it is no longer able to draw further funds from its existing credit line and doesn’t expect to meet its funding requirements for 2002. About €300 million ($274 million) have already been drawn on its bank credit facility.
“I suspect that after a statement like that, they’ll be filing for bankruptcy,” says Rex G. Mitchell, an analyst with BB&T Capital Markets. “It’s a wakeup call to debt-holders, saying ‘Help us out here!’ ”
So what has happened to KPNQwest to make its shares lose 95 percent of their value over the last year? The recent uncertainty in the alternative telecommunications market receives much of the blame, and Schreiber says the company has been especially hard hit by the dwindling of the wholesale capacity and IRU markets.
“The shakeout is well underway in this industry,” says Bruce J. Roberts, an analyst with Dresdner Kleinwort Wasserstein. “[The KPNQwest announcement] is a good example of that.” He points out that another carrier, Canada's Teleglobe (NYSE, Toronto: BCE), had announced its reorganization as well today (see Teleglobe Initiates Reorganization).
While the market forces certainly seem stacked against KPNQwest’s chances of survival, one of its parent companies, Qwest Communications International Inc. (NYSE: Q), may have dealt the lethal blow. On April 30, when Qwest was announcing its first-quarter results, it stated that after completing its agreement to buy $41 million worth of KPN's network capacity it felt no further obligation to fund the European telecom operator.
In a statement today, Qwest, which is struggling with its own liquidity problems, said it would make no additional investments in KPNQwest unless it makes sense to Qwest shareholders (see Qwest Distances Itself From KPNQwest).
Despite Qwest’s assurances that KPNQwest’s troubles won’t affect its customers or its revenues, there’s no doubt that the smaller company’s financial woes are costing it money. At the end of April, Qwest, which owns 214 million shares, or a 40 percent stake, in KPNQwest, also announced that it was writing down its investment in KPNQwest from about $1.3 billion to approximately $706 million, in line with the decline of the European company’s shares. The write-down was based on KPNQwest’s trading price of $3.30 a share. In today’s release, Qwest reiterated its intention to write down its investment in the company further at the end of the second quarter to reflect more accurately the company’s falling stock price. Another write-down “is likely and will be significant,” today’s release said.
“Qwest might lose its entire investment,” Mitchell says.
Both KPNQwest and Qwest stated today that they expect no interruption in service to customers using KPNQwest’s network. Qwest currently receives about $3 million in monthly retail and wholesale revenues from its customers using the European network.
— Eugénie Larson, Reporter, Light Reading
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