Colt Kicked by Bondholder

Despite all the problems plaguing telecom service providers of late, one might expect a carrier with more than $1.5 billion in the bank and no bonds maturing before 2005 to be standing a bit taller than its peers.

But in this uncertain climate, nothing is as it seems. Colt Telecom Group plc (Nasdaq: COLT; London: CTM.L), a British alternative carrier, is being threatened with insolvency despite its available cash stash, after one of its bondholders filed a petition with the British High Court yesterday to have the telecom company taken over by administrators (see COLT Reponds to Bondholder).

Highberry Ltd., part of New York-based hedge-fund Elliott Associates, insisted in its 15-page petition to the court that Colt will not be able to repay or refinance its £1.2 billion (about US$1.8 billion) in outstanding bonds. The company is therefore asking that it be allowed to retrieve its £75 million (about $116 million) share of the bonds now rather than wait until they mature between 2005 and 2009. If the hedge fund gets its way, it could stand to make a tidy profit, some observers say, since it is believed to have bought the bonds at about half their face value.

“It’s hard to tell what’s driving this puppy,” says Craig Johnson, an independent analyst based in Portland, Ore. “It looks like either the hedge fund wants to control the company… and is trying to gain access to good assets for pennies on the dollar… or it’s in trouble itself and needs the money.”

Highberry is reportedly seeking to have administrators from its accounting adviser, KPMG, take over the company. The accounting firm’s analysis of Colt’s balance sheet supposedly shows that the carrier’s liabilities exceed its assets, and that it is already insolvent. The petition suggests that Colt’s latest numbers, which show £2.76 billion (or about $4.27 billion) in assets, with only £1.697 million (about $2.63 billion) in liabilities, overvalued the service provider’s network infrastructure and equipment. KPMG would not comment on its analysis.

“The board of Colt welcomes the opportunity to demonstrate in court why Highberry’s action is self-serving and without merit,” the carrier said in a statement yesterday. “[T]here is no basis whatsoever for Highberry taking this action. Colt is a going concern with a robust business and a sound business plan.”

Colt recently stated that it’s in the process of slashing up to 800 jobs, and that it has written down the value of its fixed assets by £550 million (about $851 million) to meet current market conditions. The company, which has never made a profit, also says that it plans to reach cash-flow positive by 2005.

Highberry scoffs at Colt’s business plans, claiming that there is no way the carrier will be able to repay its debts on time. But it is uncertain whether the court will sympathize with the hedge fund, since any drastic actions it condones will have to be based on what the company may or may not do three years from now.

The hearing is expected to take place next month.

— Eugénie Larson, Reporter, Light Reading
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