Carrier Bankruptcies in Full Bloom

The question these days is not which carriers are on the brink of bankruptcy, but rather which are not. And the answer is: not that many.

Falling in line behind fellow competitive local exchange carriers -- McLeodUSA Inc. (Nasdaq: MCLD), which filed for bankruptcy in January, and XO Communications Inc. (OTC: XOXO), which warned last week that it might have to file for bankruptcy protection -- Metromedia Fiber Network Inc.(MFN) (Nasdaq: MFNX) looks close to finally throwing in the towel. On Monday, the White Plains, New York-based company announced that it had defaulted on several loan agreements, and that it will soon begin talks with creditors on restructuring (see MFN Defaults, Switches CEO). Its stock closed Tuesday trading at eight cents. Yes, that's eight cents.

The MFN news isn't a huge surprise: The company had already warned that it would have to file for bankruptcy if it couldn't renegotiate its $3.3 billion debt (see MFN Shields Mystery Buyer).

Of more concern is the burgeoning number of distressed or bankrupt carriers (see Carrier Crisis: Who's Most at Risk?). The sudden flood of unused assets will take a long time to clean up, and the industry's equilibrium will likely not return until all of the bankrupt carriers are restructured -- and more are likely to come.

“The financial situation of the company and the industry is screaming bankruptcy,” says Igor Volshtyn, an analyst with Tejas Securities Group Inc.

KDP Investment Advisors analyst Eric Tutterow agrees, pointing out that most, if not all of MFN’s competitors are experiencing financial difficulties. “It is an industry-wide problem,” he says.

And things don't appear to be getting better. Other developments this week point to an acceleration in carrier difficulties:

  • Bankrupt Global Crossing Ltd. (NYSE: GX) announced this week that it had lost an exclusive contract with the SWIFT consortium worth $300 million (see GlobalX to Alter Swift Deal).

  • Qwest Communications International Inc. (NYSE: Q) announced that it is taking a $20 billion to $30 billion charge reflecting a drop in asset values after its acquisition of US West. It also appears to be negotiating with the U.S. Securities and Exchange Commission (SEC) about its accounting methods (see Qwest Revises, Retraces, Replies).

  • Williams Communications Group has moved closer to an expected bankruptcy, announcing that it would take advantage of a new 30-day grace period for interest payments of about $91 million. Williams also scrapped its 2002 financial forecasts and wrote down the value of its fiber optic networks, widening its previously reported 2001 loss from $1.2 billion, or $3.08 per share, to $3.8 billion, or $7.86 per share.

    In addition, Dow Jones Newswire this morning said that the SEC is investigating Williams Companies, Williams Communications' parent, for accounting irregularities, citing unnamed sources. A Williams spokeswoman contacted this morning by Light Reading says that, to her knowledge, Williams Communications is not being investigated.

What does this glut of carriers in crisis mean for the future? The fact that so many carriers are running into problems at the same time will make it difficult for carriers in bankruptcy to sell assets. In the cases that they do, they're likely to receive pennies on the dollar.

"When you have this many companies with so many assets all available for sale, it is really a problem," Tutterow says. “There are really no bids for this type of assets at this point.”

Volshtyn says that MFN has some very strategic assets on which several of its current investors -- such as Verizon Communications Inc. (NYSE: VZ) -- depend. “It’s not like Global Crossing,” he says. “It’s not too difficult to split up. The parts are as valuable as the whole.”

In the meantime, MFN, which is controlled by billionaire John Kluge, is scrambling to put off the inevitable a little longer. In its announcement yesterday, the company stated that it is delaying filing its financial results for the fourth quarter and full year ended December 31, 2001, with the SEC until April 16. It has replaced both its CEO and CFO as well.

Some observers don't believe the company’s management is to blame. “Metromedia had one of the better managements in the industry,” Tutterow says, pointing out that operating a company and restructuring its balance sheet take different sets of skills. “Wall Street certainly seemed to think so.”

Not everyone agrees.

Volshtyn insists that the canning of executives in a time of crisis is definitely not a vote of confidence: “Obviously, the people that were there didn’t know what they were doing."

Despite a faltering customer base, towering debt, and changes in management, MFN, as well as several of the other struggling companies, might just manage to survive the current carrier meltdown. And for those that do, observers say, there is a pot of gold beckoning from the other side of the rainbow, promising that this painful consolidation process will make for a better, healthier market when the rain finally stops.

“In one shape or form, I think pieces of [MFN’s] network will be among the survivors,” Volshtyn says. But, he continues, “The whole thing is too much for one company to buy.”

— Eugénie Larson, Reporter, Light Reading
flanker 12/4/2012 | 10:40:41 PM
re: Carrier Bankruptcies in Full Bloom Flag said in its last SEC filing that they would run out of money in 2003 if they did not raise more capital. And they said it "wasn't likely" that they'd raise more capital in the current environment.
techtalkie 12/4/2012 | 10:40:39 PM
re: Carrier Bankruptcies in Full Bloom Can some one comment on the future of XO..I am one of the troubled XO's employee..
netskeptic 12/4/2012 | 10:40:36 PM
re: Carrier Bankruptcies in Full Bloom I am wondering how many of these carriers made an early bet on VOIP and MPLS as a base for future revenues ?


edzed 12/4/2012 | 10:40:32 PM
re: Carrier Bankruptcies in Full Bloom I had to respond to your distress signal. XO had a great idea - to combined wired and wireless CLEC assets with a business ISP. But their capital structure, like everyone else's, was too leveraged with debt.

There are two potential outcomes:

- Debt restructuring and continuation of operations
- Sale of the pieces and partial shutdown

Either outcome will make the stock worthless.

In the current environment, the debt restructuring proposal by Forstmann Little and Telmex is likely to win out. That implies that most XO employees are likely to retain their jobs.

Ed Z
apeterc 12/4/2012 | 10:40:24 PM
re: Carrier Bankruptcies in Full Bloom FLAG defaulted on an interest payment over the last week-end and is reviewing its options (likely debt to equity swap, ch11 otherwise).
Alcatel said yesterday they would write down most of outstanding receivables & vendor financing related to FLAG, for an amount of approx. EUR100m.
None of this is surprising if you read between the lines of last Feb's SEC filing of FLAG...

I'm surprised the article does not mention this carrier (about $3bn assets, not a small player).

Also, not a word about the situation at Level 3 which is less than rosy (next to "restructure"?), or at Broadwing which seemingly is not that bad.
Sheridan 12/4/2012 | 10:39:42 PM
re: Carrier Bankruptcies in Full Bloom Seems like someone needs to survive, and dare I say thrive, in the long run, to cast a lifeline to the suffering components folks. Who then (other than the RBOCs)?
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