Cisco exchanges $260 million in debt for more equity so that Cogent can avoid bankruptcy

June 20, 2003

3 Min Read
Cisco Powers Cogent's Restructuring

Cogent Communications Group Inc. (Amex: COI), with the help of Cisco Systems Inc. (Nasdaq: CSCO) and several investors, has spared itself from bankruptcy while going a long way toward eliminating its debts. In the past six months, the high-speed data provider says it has reduced its total debt from more than $380 million to about $27 million.

In exchange for more equity, Cisco, the vendor that financed the carrier in its early days, forgave a huge chunk of Cogent's debt and arranged it so that Cogent's first payment on the remaining debt isn't due until 2006.

Instead of winding down -- as many indebted carriers have done -- Cogent is now shopping for regional Internet service providers it can buy to add to its customer base. "We feel quite confident that our company now has ample cash to become self-sustaining and will have the availability to acquire other companies," says Cogent CEO Dave Schaeffer.

Schaeffer's plan is about the same as it ever was. Cogent built its own optical network to provide metropolitan data services more efficiently than retro-fitted voice networks. Cogent will buy regional ISPs and other data providers and move their customers to its network, to add to its revenues and lower the cost of providing service. So far Cogent's service is available to more than 750 buildings in the U.S., and the company has about 5,500 businesses and universities as customers, according to Schaeffer.

Cisco and its financing arm, Cisco Systems Capital Corp., had a lot to do with Cogent's ability to make it this far. Back in October 2001, Cisco provided Cogent with a credit facility. The facility stated that Cisco would finance equipment purchases of up to $270 million for Cogent; provide the carrier with up to $64 million in working capital; and allow it up to $75 million in interest and fees related to the facility.

The credit facility required Cogent to meet certain financial milestones, which it failed to do. Cogent was in default under the credit facility, and Cisco could have accelerated the loan payments and required Cogent to pay up, according to SEC filings. Given that Cogent only had about $17.1 million in cash and investments as of March 31, Cogent would have had to file for bankruptcy protection had Cisco asserted itself.

Instead, Cisco and Cisco Capital agreed to cancel approximately $262.8 million of Cogent's debt. It also required a $20 million cash payment from Cogent and it acquired 11,000 shares of Cogent's Series F preferred stock. The transaction reduced Cogent's indebtedness to Cisco Capital to about $17 million.

Cogent couldn't afford to pay Cisco $20 million in cash, so it had to go back to its venture capital investors to raise more money. The investors -- Jerusalem Venture Partners, Oak Investment Partners, WorldView Technology Partners, Broadview Capital Partners, Boulder Ventures, and Nassau Capital LLC -- chipped in for about $41 million, which goes to helping Cogent appease Cisco and fund its business. After the financing, Cogent's VCs, Cisco Capital, and Cogent's employees will own 99 percent of the company.

According to SEC filings, Cisco's stake in Cogent increased to 20.21 percent, from 4.97 percent, while Schaeffer's stake dropped to 1.71 percent, from 12.58 percent. Each of Cogent's other investors saw its stakes increase slightly.

Cogent still hasn't tasted profitability. For the first three months of this year, it lost slightly more than a dollar for every dollar it booked in net service revenues. But with the bulk of its network built and the restructuring complete, Cogent says it can now concentrate on acquiring customers -- both through aggressive sales and buying up other small carriers.

"Losing focus is... the death knell of a startup," says Schaeffer. "We didn't get distracted and try to be all things to all people."

Cogent stock powered up $0.35 (18.42%) on the news today, to close at $2.25.

— Phil Harvey, Senior Editor, Light Reading

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