MFN Defaults Mount

Metromedia Fiber Network Inc.(MFN) (Nasdaq: MFNX) moved one step closer to bankruptcy today when it announced that it had defaulted on $975 million in debt held by an affiliate of Verizon Communications Inc. (NYSE: VZ) (see MFN in Debt Trouble With Verizon ). Despite the 30-day grace period the company had been given, it did not manage to make the $30 million interest payment on the debt.

“When companies go into a grace period, there is an extremely high likelihood that they will default,” says says Igor Volshtyn, an analyst with Tejas Securities Group Inc. “The writing was on the wall.”

It won’t take much to push the provider of optical fiber communications networks over the edge. The company’s stock had only to fall one penny to incur a 16.7 percent decline today. The shares are currently selling for 5 cents a pop, having lost more than 98 percent of their value over the last year.

The missed payment to Verizon might force MFN to accelerate the repayment of its entire debt to the company.

In today’s release, MFN reiterated previous warnings that if its current discussions with creditors to restructure its $3.3 billion debt are not successful, it will have to file for chapter 11 bankruptcy protection. It also warned that any restructuring would probably cause substantial dilution to the company’s stockholders.

“This is no surprise,” says KDP Investment Advisors analyst Eric Tutterow. “This was not really anything that could have been avoided. This is a problem affecting the industry in general. There aren’t too many CLECs that aren’t in trouble.”

And indeed, the number of distressed or bankrupt competitive local exchange carriers has continued to grow (see Carrier Bankruptcies in Full Bloom). FLAG Telecom (Nasdaq: FTHL; LSE: FTL) last Friday joined recent filers such as Global Crossing Ltd. (NYSE: GX) and McLeodUSA Inc. (Nasdaq: MCLD) in the Chapter 11 Club (see FLAG Flies Into Bankruptcy). Asia Global Crossing Ltd. (NYSE: AX) announced yesterday that it is taking advantage of a 30-day grace period for paying the interest on its $408 million debt (see Asia GlobalX to Restructure Debt). Bankruptcy filings by XO Communications Inc. (OTC: XOXO) and Williams Communications Group appear imminent as well.

This is not the first time MFN has defaulted on its debt. Earlier this month, the New York company announced that it had automatically defaulted on more than $440 million in notes and other loans from major creditors and banks when it missed an $8.1 million interest payment on $231 million in notes issued to Nortel Networks Corp. (NYSE/Toronto: NT). The defaults effectively dismantled the $611 million financing package -- meant to save the company from bankruptcy -- MFN had secured in October.

Since that announcement, MFN has also lost major contracts worth a combined sum of $550 million with Verizon and Genuity Inc. (Nasdaq: GENU) (see MFN Terminates Fiber Agreements). The company recently announced that it has appointed new executives to help oversee its restructuring efforts (see MFN Defaults, Switches CEO).

While observers agree that a bankruptcy filing by MFN is inevitable, it is uncertain when such a filing might occur.

“There is not always a huge incentive for bondholders to file a company,” Volshtyn says. “If they don’t have a prepackaged plan things can get really messy. A lot of the companies that are close to filing are waiting it out. We’ve actually seen companies go from nine months to a year without filing.”

In MFN’s case, it will probably take a while. It is doubtful that the company will be able to find a bidder willing to take over its entire network, and a liquidation of its assets could drag out (see MFN Shields Mystery Buyer). And while Verizon, which relies on much of the MFN network, might be interested in taking some of the assets as compensation for the defaulted loans, it is unlikely that it will be among the investors bidding for the company.

“They’ve already put too much money into Metromedia,” Volshtyn says.

— Eugénie Larson, Reporter, Light Reading
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