Chapter 11: Good for Whom?

Through the course of its recessionary downturn, the telecom industry has maintained a pretty solid track record of preserving ailing companies. Since the boom went bust, the roster of service providers that have made it successfully through Chapter 11 shows that economic absolution is available to a sizeable range of seekers (see Bankruptcy Boondoggle).

But the spirit of forgiveness may be reaching its limit. The case of MCI (Nasdaq: MCIT) has raised a clamor over whether a company's legal woes can force it to be sold for parts instead of resurrected, even if its plan is approved. In the latest flap, creditors and competitors are upping the pressure on the beleaguered carrier as it faces a stern sanction from the U.S. government (see Government Bans MCI).

All of this has put the whole U.S. bankruptcy process, as it relates to the telecom industry, under the spotlight. That's why Light Reading has dedicated its August Research Poll to the issue of whether MCI should be liquidated or resuscitated, from different perspectives. To give your own views and see what other readers think, click here.

Background: When companies file for Chapter 11 under the U.S. Bankruptcy Code, they are allowed to stay in business as long as a plan for reorganization is approved by a court with input from creditors. The reorg is intended to solve the company's financial problems.

If the reorg plan fails or there seems to be sufficient reason to think it will, creditors can petition the bankruptcy judge to sell the ailing company's assets and recoup some of their losses. The company itself also can move for liquidation. In either case, if the judge approves, the company files for Chapter 7 status under the code.

Alternatively, companies' assets can be purchased while they're in Chapter 11; in that case, the bankruptcy court must approve the sale to a new owner, but no Chapter 7 status is required.

Several industry forces say this routine isn't stringent enough. They say carriers should also be liable to automatically trip into Chapter 7 if they have proven records of fraud or corporate malfeasance.

The arguments from MCI's detractors are well known by this time: Despite arguments by the company that it's eradicated the source of the problems that forced it into bankruptcy, competitors and some shareholders say its reemergence would give it an unfair advantage over carriers that have stayed the course and kept their metaphorical noses clean (see MCI Settlement: What's Next? and Reports: It Began With Bernie).

Examples of recent Chapter 7 filings include broadband provider Network Plus Corp. In the past, others have been liquidated or sold while in the bankruptcy process, including satellite provider Iridium, NorthPoint Communications, PSInet, Star Telecommunications, Winstar, and Zephion, to name just a few.

In most cases, the assets of these firms wound up in the networks of competitors or other service providers. Cogent Communications Group Inc. (Amex: COI), for instance, bought a portion of PSInet (see Cogent Munches Midwestern ISP), and IDT Corp. doubled its domestic capacity with assets from Star (see IDT Gets Nationwide Fiber Network). Iridium's assets were used to establish a new company, Iridium Satellite LLC.

Overall, the number of telecom firms that are busted up appears to be fewer than a quarter of the total that file for Chapter 11, going by information from Nationwide Research & Consulting Inc. Since 2000, the firm figures, roughly 87 telecom carriers have gone into Chapter 11. Most of those are still in business. What's more, the number of telecom firms filing for bankruptcy has gone down: In 2000, seven filed; in 2001, 26; in 2002, 33; in 2003, so far, eight.

On the face of it, telecom providers seem to fare better than the general roster of firms when it comes to emerging from bankruptcy. According to the American Bankruptcy Institute, more than 70 percent of the firms that filed for bankruptcy nationwide in the first quarter of 2003 filed for liquidation; less than one percent filed for Chapter 11.

The relative success of telecom companies in getting out of hock isn't surprising; telecom worldwide is still viewed as a key market with a sizeable future that's undergoing temporary setbacks (see Workers Oppose H-1B Bill and VC Figures Hint at Upswing).

— Mary Jander, Senior Editor, Light Reading

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optical 12/4/2012 | 11:39:19 PM
re: Chapter 11: Good for Whom? This may sound harse but for the health of the overall telecom market, MCI needs to be put out of business. We need for some of these carriers to just go away and with MCI's track record of lying , cheating and stealing, they need to be one of the leaders in terms of being shut down. Other carriers have the capacity to pick up MCI's customer list. They truly don't deserve the luxury of Chapter 11; their crimes are too great to be afforded this protection. Just my opinion.
myoptic 12/4/2012 | 11:39:18 PM
re: Chapter 11: Good for Whom? Don't believe everything you read.

The massive lobbying campaign to prevent MCI from emerging from Chapter 11 is being financed by AT&T and the RBOCs because they don't want the competition.

Granted, Ebbers and company screwed up big-time, and for that they should be put behind bars. But to destroy the jobs of the thousands of MCI employees and remove a strong competitor from the market would be wrong.

The recent slander campaign by Verizon et al, claiming that MCI comprimised national security by rerouting calls through Canada is perhaps the most ludicrous and hysterical accusation I've ever heard. Every carrier uses least-cost routing and it is perfectly legal.

As for Ch. 11, one of the founding principles of our country is the fact that individuals and companies who screw up can get their debts forgiven and start clean. This is in contrast to inflexible laws in Europe where the bankrupcy of most competitive carriers has resulted in virtual recreation of PTT monopolies.

The CEO of MCI, Michael Capellas is a strait shooter with a strong track record. Lets give him the opportunity to be successful and help rebuild our industry.

Oh, before I get flamed, no I don't work for MCI.
fiber_r_us 12/4/2012 | 11:39:17 PM
re: Chapter 11: Good for Whom? There is *plenty* of competition without Worldcon/MCI. The idea that they must remain to maintain a "competitive" environment is a joke. And no, I don't work for any of their competitors.
rjmcmahon 12/4/2012 | 11:39:15 PM
re: Chapter 11: Good for Whom? There is *plenty* of competition without Worldcon/MCI. The idea that they must remain to maintain a "competitive" environment is a joke.

This "competition issue" seems like modern day rhetoric from both sides.

The issue to me is who should decide the continued existence of this institution? It shouldn't be decided by the biased feds and the remains of yesterday's monopolies. What does it take to let the courts and the consumers make the judgements while keeping the regulators and politicians from their tampering?
telebud 12/4/2012 | 11:39:13 PM
re: Chapter 11: Good for Whom? But that's not what consumer's union said about
Worldcom/Sprint Merger in 2000.
Consumer's said the merger would deminish consumer
choice and competion in US telecom market.
What has changed since then? More companies going
broke. No one's expanding so I ask if WorldCON
is throwed out wid da baby wash..where does that
leave consumer choice and competion. In ATT lap?
They would love it. I oppose it just on that
reason alone. Let the market kill Worldcon
if consumers don't want them find..they go.
farfields 12/4/2012 | 11:38:55 PM
re: Chapter 11: Good for Whom? The Ch 11 business model distorts a true market for shareholders, employees, customers, suppliers and competitors. These companies are allowed to continue with a failed business model for way too long. If the managers have already failed once, then why given them an open-ended second chance? This just screws the rest of the market from earning a living. For any of the above stakeholders, if an entire industry performance is skewed by Ch11 business models then none of them will have good confidence in the ability of any other company to produce the required returns. The decisions shouldn't just be made for the good of the failed business, but of the wider market and economy as a whole.

The timescale should be one financial quarter
lighten up!! 12/4/2012 | 11:38:55 PM
re: Chapter 11: Good for Whom? Finally MCI is reaping what it sowed when it destroyed the Bell System. This company has been run by crooks from its very begining and its time to pay the piper. It's unethical behaviour over the course of years has finally caught up. I hope it goes belly up and never emerges...good riddance!!!
Mary Jander 12/4/2012 | 11:38:54 PM
re: Chapter 11: Good for Whom? It was brought to my attention that Iridium LLC was a case in which a company was bought directly out of Chapter 11, without having to file for Chapter 7 status. A new company, Iridium Satellite LLC, was formed from the assets after the purchase. I have updated the story to reflect that this is another alternative for companies.
materialgirl 12/4/2012 | 11:38:50 PM
re: Chapter 11: Good for Whom? Lets keep in mind the roles of Chapter 11 and Chapter 7. They are not tools for public policy. They are not tools for justice. They are simply tools for business owners to recoup the most from a damaged investment.

When a company cannot meet its debt obligations, creditors own the company at the expense of equity holders. Once debtors own the company, they get to decide jointly what to do with it. Since bankers do not want to run telephone companies (or any other company for that matter), if they can be convinced that a new management team can "earn its way out" of a one-time mess, they restructure under chapter 11 and take a haircut.

If they give up on the business model, or if no attractive management team shows up to fix the mess, they liquidate the assets to recoup their loss by selling assets. Bankers prefer chapter 11 for internal political reasons. They don't look SO stupid as to have loaned tons of money to a TOTAL loser.

The MCI problem is a result of several factors. There were crooks. Our justice system should be going after them, and it is not. This is not the role of Chapter 7 or Chapter 11.

We also face significant policy challenges. Our telecom infrastructure is steadily falling apart before our eyes as the economic model of the "new IP paradigm" rips asunder the economic model of the legacy phone network.

This is a public policy issue. Questions such as: the value of universal service, and at what speed, the role of intellectual property versus carriage (being a "telecom" provider versus an "information" provider), the role of free speech versus content ownership, the need for "last mile" monopoly for cost's sake, versus the relative chaos of competition, the need to invest in a fat optical IP backbone to facilitate business communications and employment, are all public policy issues that are being conveniently ignored. If you want decisions made here, complain to your representative, not to the Chapter 11 courts. IMHO, our administration is failing us badly here.
chetbr 12/4/2012 | 11:38:49 PM
re: Chapter 11: Good for Whom? I still remember when MCI was the only viable alternative to being ripped off by the bell monopoly. If MCI's creditors are willing to keep the company going then they are willing to eat the short term loss. A little competition is a good thing
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