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The Post-Chapter 11 Hangover

Yesterday, a U.S. bankruptcy court judge in Manhattan approved Global Crossing Holdings Ltd.’s reorganization plan, paving the way for it to exit bankruptcy early next year (see Court OKs GlobalX Reorg Plan).

Good news? For Global Crossing, maybe; for the industry, probably not. The last thing the industry needs, according to several experts, is a reborn carrier in a market rife with capacity. One by one, formerly sunken carriers are crawling out of bankruptcy hibernation. This poses new problems for an industry that is still struggling to recover.

Over the past two months, Williams Communications (or WilTel Communications Group Inc. (OTC: WTELV), as it's now called) and 360networks Inc. have also reemerged from bankruptcy (see Williams Bolts Out of Bankruptcy and 360networks Restructuring Approved). Global Crossing, which buckled under the weight of a $12.4 billion debt-load and plummeting bandwidth prices less than a year ago (see Global Crossing Falls Overboard), has now had its debt slashed to a mere $200 million and its headcount cut from 16,000 to 5,350. The company is indeed leaner, meaner, and better positioned to compete in a hard-hit market.

But can these reorganized carriers make money now? The carriers’ balance sheets might look a lot better today than when they filed for Chapter 11, but the market conditions they’re returning to don’t look a whole lot more promising.

"The environment hasn’t changed,” says Jeff Kagan, an independent analyst based in Georgia, pointing out that the economy has not improved much and that there’s still a fiber glut to deal with. "The conditions that put them into bankruptcy still exist."

A major problem, several observers say, is that the carriers don’t seem to have made any major alterations to their business plans. As a result, many of them could tumble back into bankruptcy, according to a report called “Telecom Distressed Assets: Bondholders Beware,” published in August by i2 Partners LLC (see Chapter 11 'Fix' is Doubtful).

"[A] replay of the prior 'me too, but cheaper' business strategies is highly unlikely to result in successful reorganization of sub-scale players despite the enormous balance sheet advantages they are gaining from reorganization,” says the report.

Sean Doherty, a managing partner at the Venture Asset Group, however, says he thinks there are a lot of possibilities out there for the restructured carriers. “I think that on a macro-level, there’s still a lot of demand,” he says. “There’s some irrational pessimism out there.”

For the competitors that haven’t been through a Chapter 11 cleansing process, pessimism over the second coming of companies like Global Crossing seems reasonable. The main concern for them is that reemerging carriers will attempt to compete by severely undercutting prices.

"The biggest question is what they will do with their newfound financial superpowers,” Kagan says “The smoke signals we’ve seen from them don’t look good... They’re talking about being very aggressive on pricing.”

“The potential is there for them to undercut on prices,” agrees Gartner/Dataquest analyst William Hahn. However, he doesn’t expect the formerly bankrupt carriers to indulge in these tactics for the next 12 to 18 months, as they try to regain credibility in the marketplace.

While potential pricing pressures from wholesale players like Global Crossing and 360networks is worrying, observers say that the effects on the overall market won't be too large. “There may be gruesome trench warfare for a while,” says i2 Partners analyst Andrei Jezierski, “[but] I’m not sure they’re in a position to [cut prices] in markets where it matters, or with customers that matter.”

A more disturbing possibility is that telecom giant WorldCom Inc. (OTC: WCOEQ) will resurface and spark a even more dangerous pricing war (see WorldCom Files for Bankruptcy). There has been a lot of speculation over how much damage a virtually debt-free, unrestrained version of the carrier could cause, potentially sending competitors into bankruptcies of their own.

WorldCom competitor Sprint, however, insists that’s not going to happen. At the company’s investor meeting last week, Ron LeMay, Sprint’s president and COO, said he wasn’t worried about the potential affects of a WorldCom reemergence. “We find it extremely unlikely that carriers will emerge and immediately drop prices or even consider it,” he said, pointing out that WorldCom lost $1.5 million in October alone without even having to pay interest on its debt. “Carriers will have to price to cover costs... The only way for that to happen is for prices to increase.”

But while intentions may be good (or at least respectable) as the carriers resurface, the financial strain of a shaky market could soon lead them back to their former ways.

— Eugénie Larson, Reporter, Light Reading
whyiswhy 12/4/2012 | 9:09:59 PM
re: The Post-Chapter 11 Hangover Even pre-emergent companies might be allowed (by the court) to drop prices, if their net revenues are improved in the process. With many of these companies sitting on excess capacity, the incremental cost is zero, and the revenue is additive. This best serves their creditors.

Of course, most companies will not easily admit this fact to the court...and will push the court towards as much debt relief as they can get without losing capacity. This best serves the investors.

To be respectful of the court, and avoid further litigation, the companies must wait some graceful period after emerging before going "predatory".

But the basic idea of lower prices from post 11 companies will happen.

JMHO

-Why
BackSlash 12/4/2012 | 9:09:59 PM
re: The Post-Chapter 11 Hangover If I have a high capacity network which has been depreciated by oh.. 1 Billion dollars.. and my current operating budget / headcounts have been adjusted due to the chpt 11 plan.. I can now offer transport pipes at a more resonable return of investment timeline.

Nice practice. Build network..To much $$ outflow with no hope in he\\ of getting the investors money back in a resonable amount of time (say less than 100 years).. So go into chpt 11.

Come out with the network / less people and new company. Will they make it...? If they don't do a thing to the network.. and just treat it as a bunch of big pipes.. yes.. sure as long as they have customers that will create binding chpt 11 proof contracts... Welcome to the new world of optical networking..

No more pump and dump.. This is pump, dump, crash, erase, respawn.

\
BobbyMax 12/4/2012 | 9:09:41 PM
re: The Post-Chapter 11 Hangover There is nothing that would allow Global Crossing to be a dominant player in the telecom business. Its conduct has been reprehensible and based on this alone many companies will do business with Global Crossing. It is unfortunate that the company and its employees who were engaged in wrongful activities have not been prsecuted by the government.
willywilson 12/4/2012 | 9:09:32 PM
re: The Post-Chapter 11 Hangover There is nothing that would allow Global Crossing to be a dominant player in the telecom business. Its conduct has been reprehensible and based on this alone many companies will do business with Global Crossing. It is unfortunate that the company and its employees who were engaged in wrongful activities have not been prsecuted by the government.

-------

There are scores of companies in the same category. There is a settlement pending between Spitzer and the brokerages, and once it's rubber-stamped all of the other fraud will be swept under the rug once and for all.

This was the fourth or fifth massive financial fraud since 1970, much of which has its roots in the petrodollar flood that began back then. Who knows, maybe the challenge of recycling drug profits is involved as well. There was the Latin debt crisis, the Continental Illinois bank failure, the S&L situation and related real estate bubble, the BCCI scandal, and then the tech bubble.

As of these scandals show how much dry rot has crept into the U.S. political and financial system. Each time the scandals are covered up and the guilty go free, the whole structure gets weaker and less likely to be reformed.

I really fear for what's coming next. Sure looks to me as if we've got the most serious global economic situation on our hands in nearly 100 years, combined with a U.S. political and social system that resembles Brazil, Mexico and Argentina more and more every day.
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