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Global Crossing Falls Overboard

International carrier files Chapter 11, leaving bondholders and banks with a slice, while shareholders get zip

January 28, 2002

4 Min Read
Global Crossing Falls Overboard

After struggling for years with mounting losses and ballooning debt, Global Crossing Ltd. (NYSE: GX) today filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York, with coordinated proceedings in the Supreme Court of Bermuda. The carrier also announced that its Asian business partners plan to invest a large sum of cash to help it clean up its balance sheet (see Global Crossing Files Chapter 11).

Hutchison Whampoa Ltd. and Singapore Technologies Telemedia Pte. Ltd. will give Global Crossing $750 million in cash in exchange for a joint majority stake in the company. Asia Global Crossing Ltd. (NYSE: AX) and Hutchison Whampoa each own 50 percent of Hutchison Global Crossing, a telecommunications service provider in Hong Kong. Asia Global Crossing and a subsidiary of Singapore Technologies Telemedia each own 50 percent of StarHub Crossing, which owns and operates a high-capacity backhaul network in Singapore.

While the carrier’s bankruptcy was anticipated, the effects will likely be felt on many levels, impacting debtors, shareholders, customers, and equipment suppliers (see What's Next for GX?).

Bondholders and bankers that have lent the company money will get a big chunk of the $750 million and will also likely get the remaining equity stake in the reorganized company. It's safe to say that the company’s common and preferred shareholders, including employees with equity investments, will get nothing.

“It will be worked out through the bankruptcy court, but it’s true that current shares in the company won’t hold any value,” says Tisha Kresler, senior manager of media relations for Global Crossing.

As for its customers, John Legere, CEO of Global Crossing, said in a statement issued this morning that customers will not be affected during the restructuring process. These customers, in over 200 major cities in 27 countries -- which include big names on Wall Street like Merrill Lynch & Co. Inc.and J.P. Morgan & Co. -- will continue to have uninterrupted services throughout the bankruptcy proceedings, he said. He also promised that the company would not lay off any more employees. It has already cut about 3,200 jobs.

“Ours is a balance sheet issue, not an operational one,” said Legere in the statement, “and today’s actions are intended to directly address this issue.”

But bondholders scoff at this notion, given the fact that the company is not yet cash-flow positive and is reporting $12.4 billion of liabilities, including $7.6 billion of debt on $25.5 billion worth of assets.

“They’ll have to do something,” says one bondholder, who didn’t want to be named. “They can’t raise their prices, so it looks like they’ll have to cut down on some of their less profitable service offerings or make more staffing cuts. They could also try to get another loan.”

But getting another loan means that existing debtors get even less, something they’d likely reject in negotiations.

Equipment companies selling gear to Global Crossing will also likely feel the pinch. Although Kresler notes that Global Crossing is required by the bankruptcy court to honor all current contracts, one can’t help but wonder how these companies will be able to collect on these contracts if Global Crossing simply doesn’t have the money to pay them.

Companies likely affected include Nortel Networks Corp. (NYSE/Toronto: NT) and Cisco Systems Inc. (Nasdaq: CSCO), which both supply Global Crossing with optical transport gear (see Nortel Goes Long and Cisco, Juniper Go to the Mat). Lucent Technologies Inc. (NYSE: LU) will also feel some hurt, as Global Crossing was one of only two customers supposedly deploying its all-optical Lambda Router (see Lucent Lands LambdaRouter Deal). And Lantern Communications Inc., a startup making gigabit Ethernet gear using the developing resilient packet ring technology, will also likely be affected (see Lantern and Global Crossing Ink Deal). The startup has had a joint development agreement with Global Crossing since November 2000. Lantern has not announced that it is shipping to any customers.

Global Crossing today traded down $0.21 (41.18%) to $0.30. The company has lost more than 96 percent of its value over the past 12 months.

— Marguerite Reardon, Senior Editor, Light Reading

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