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MFN Falls Into Chapter 11

Light Reading
News Analysis
Light Reading
5/20/2002

Metromedia Fiber Network Inc.(MFN) (Nasdaq: MFNX) is the most recent carrier to go Chapter 11. The company, which has been struggling with a $3.3 billion debt load, announced this morning that it and most of its domestic subsidiaries have filed for chapter 11 bankruptcy protection.

The filing should come as no surprise. The telecom company, which mostly builds high-speed fiber optic metro networks, warned back in March that it might have to file for bankruptcy, and its stock has been trading for less than a quarter per share since then (see MFN Withdraws Guidance). When the company’s stock last traded on Friday, it was at a nickel a share. On Saturday, Nasdaq announced that it had halted trading on MFN stock (see Nasdaq Stops Trading in MFN)

“This is not surprising, because their financial situation was tenuous,” says RBC Capital Markets analyst David Bank. “But most failures have been on long haul. Local fiber is supposed to be the most valuable asset there is, so for them to have failed is disappointing.”

Global Crossing Ltd. (NYSE: GX), Williams Communications Group Inc., McLeodUSA Inc. (Nasdaq: MCLD), FLAG Telecom (Nasdaq: FTHL; LSE: FTL), and Yipes Communications Inc., are among the bankrupt telecoms, while Qwest Communications International Inc. (NYSE: Q) and Level 3 Communications Inc. (Nasdaq: LVLT) are struggling to avoid default on their credit agreements (see Carrier Bankruptcies in Full Bloom).

Since the March warning, MFN has missed several interest payments, the last of which it announced last Wednesday, when it reported that it had not paid the approximately $32 million in interest on its $650 million 10 percent senior notes, due that day (see MFN Delays Report (Again)). It has also changed CEOs and continued to delay reporting its annual results for 2001, as well as its quarterly results for the quarter ended on March 31. Recently it also lost contracts with both Genuity Inc. (Nasdaq: GENU) and Verizon Communications Inc. (NYSE: VZ) (see MFN Defaults Mount).

Verizon also announced last month that it had written down its entire 6.6 percent stake in the company. A company spokesperson said today that due to the write-down, the MFN bankruptcy filing would not hurt Verizon further.

MFN stated today that it had hired Impala Partners LLC and UBS Warburg to assist it through the restructuring process. To cut costs, the company said that it would get rid of idle data centers or non-essential offices, reject burdensome vendor contracts, and cut jobs.

Metromedia Fiber Network Government Services Inc. was not among the MFN subsidiaries included in today’s filing.

“We believe that this is the best course to ensure our long-term stability,” Kara Carbone, a spokesperson for MFN said this morning, blaming the company’s woes on the cash crunch that followed the downturn in the economy.

The company insists that the bankruptcy filing will not affect customer service, since it had reached an agreement with its senior secured lenders that would allow it to fund operations while it goes through the restructuring.

“Customer service is still our main priority,” Carbone said. “We hope [the support from our customers] will continue.”

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com

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skeptic
skeptic
12/4/2012 | 10:21:53 PM
re: MFN Falls Into Chapter 11
I have no background in economics, can someone please shed some light on the following! MFN has $7 billion in assets, their product is shipping... why are they in Ch 11? here is the story from DJ.
---------------------------
Becuase no matter how your assets are valued,
if you run out of cash your out of business.

dwdm2
dwdm2
12/4/2012 | 10:21:53 PM
re: MFN Falls Into Chapter 11
I have no background in economics, can someone please shed some light on the following! MFN has $7 billion in assets, their product is shipping... why are they in Ch 11? here is the story from DJ.

Thanks.

--------------
Metromedia Fiber Network Filing Lists Assets Of $7.02 Billion

5/20/02 11:01am

WASHINGTON -(Dow Jones)- In filings with the U.S. Bankruptcy Court in Manhattan Monday, Metromedia Fiber Network Inc. (MFNXE) reported having assets of $7.02 billion and debts of $4.26 billion as of Sept. 30, 2001.

An earlier story incorrectly reported the debt amount at $5.36 billion.

The financial information comes from the company's unaudited Form 10-Q filing for the quarter ended Sept. 30. The balance sheet information doesn't reflect subsequent events, such as a $611 million financing package on Oct. 2, 2001.

The company hasn't yet filed its Form 10-K annual report for 2001 and said it's continuing to work with its auditor to restate its financial results for the first three quarters of 2001 and to determine the amount of 2001 impairment charges.

A preliminary estimate of the impairment is between $3.9 billion and $4.3 billion, the company had said late last month.

(This story was originally published by Dow Jones Newswires)

Copyright (c) 2002 Dow Jones & Company, Inc.

All Rights Reserved

flanker
flanker
12/4/2012 | 10:21:51 PM
re: MFN Falls Into Chapter 11
can someone please shed some light on the following! MFN has $7 billion in assets, their product is shipping... why are they in Ch 11?

Chapter 11 means they MFN is not paying their lenders; it doesnt mean they are broke or going out of business.

Chapter 11 seems to have been made for companies like Global Crossing anf MFN that borrowed billions to construct assets that are now worth millions.

MFN may or may not be cash flow positive (I havent checked) but filing for chapter 11 means their operating cash flow is protected against creditors.

Chapter 11 also lets MFN pick and choose (literally) from all of its leases and performance contracts. It can continue honoring performance contracts it likes, and it can walk away from performance contracts that drain cash.

Finally, chapter 11 wipes out the equity shareholders, so a new investor can walk in and get control relatively cheap. The down side is that the new investor has to pay off 100% of the debt on secured creditors and a percentage determined by the court on senior unsecured creditors. Everyone below senior unsecured is f*cked, including junior bond holders, preferred equity holders and especially common shareholders, who get zero.









anozynot
anozynot
12/4/2012 | 10:21:51 PM
re: MFN Falls Into Chapter 11
What has happened to Quantum Bridge, is it down and out?
tape fighter
tape fighter
12/4/2012 | 10:21:50 PM
re: MFN Falls Into Chapter 11
"I have no background in economics, can someone please shed some light on the following! MFN has $7 billion in assets, their product is shipping... why are they in Ch 11? here is the story from DJ."

Their return on assets is lower than their cost of debt (or equity).

This is a losing battle and will lead to destruction of value and depending on the severity Ch 11.
DoTheMath
DoTheMath
12/4/2012 | 10:21:47 PM
re: MFN Falls Into Chapter 11
"I have no background in economics, can someone please shed some light on the following! MFN has $7 billion in assets, their product is shipping... why are they in Ch 11? here is the story from DJ."

----------------------------------------------

The only *facts* here are the liabilities. The value they put on the assets ($7 billion) is an accounting *opinion*. The bankruptcy is because that opinion does not match reality anymore. Look for a massive write-down in the asset values, followed by debt-to-equity swap (i.e debt holders getting equity, wiping out former equity holders) failing which liquidation and firesale of the assets.

Almost the entire industry has this problem to vaying degrees: assets are being carried at values that do not reflect reality. Some carriers could hope to gently ride this out, others have to go through Chapter 11. But the more carriers go through Chapter 11 and clean up their balance sheets, the more pressure it puts on remaining non-Chapter 11 guys. Why should, say, a Sprint repay its debt in full, if a Worldcom goes through a Chapter 11 filing that wipes out its debt? The post Chapter 11 Worldcom will have a huge economic advantage over the pre-Chapter 11 Sprint.
scooby
scooby
12/4/2012 | 10:21:46 PM
re: MFN Falls Into Chapter 11
And why should a service provider pay a vendor for new network gear when they can buy slightly used gear, or entire routes or segments, at the XXX going out of business sale?
flanker
flanker
12/4/2012 | 10:21:45 PM
re: MFN Falls Into Chapter 11
do-the-math, you're extrapolating a lot from a few facts.


The only *facts* here are the liabilities. The value they put on the assets ($7 billion) is an accounting *opinion*.

Well, they're booked at historic cost. You can call it *opinion* if you like.

The bankruptcy is because that opinion does not match reality anymore. Look for a massive write-down in the asset values, followed by debt-to-equity swap (i.e debt holders getting equity, wiping out former equity holders) failing which liquidation and firesale of the assets.

OK


But the more carriers go through Chapter 11 and clean up their balance sheets, the more pressure it puts on remaining non-Chapter 11 guys.

Maybe.

Why should, say, a Sprint repay its debt in full, if a Worldcom goes through a Chapter 11 filing that wipes out its debt? The post Chapter 11 Worldcom will have a huge economic advantage over the pre-Chapter 11 Sprint.

Interesting thought, but Sprint maintains a far lower cost of debt, and they can borrow more aggressively as the industry recovers. You are assuming the market remains in the dumps for years. nobody goes into bankruptcy for competitive advantage, look at the downside

**your customers bail in droves.
**you cant borrow.
**you face shareholder litigation
**your new investor goes through the books, finds irregularities, and people get fired, or worse, go to jail.
**your vendors stop providing you with working capital financing.
your wholesale carriers turn off your network, and terminate your voice termination contracts.
** You get thrown out of rented colo facilities.
**Your vendors pull their leased equipment from your network.

WCOM won't have any competitive advantage if they go bankrupt. I hope it doesn't happen.

FWIW







DoTheMath
DoTheMath
12/4/2012 | 10:21:44 PM
re: MFN Falls Into Chapter 11
>The only *facts* here are the liabilities. The value they put on the assets ($7 billion) is an accounting *opinion*.

>>Well, they're booked at historic cost. You can call it *opinion* if you like.

---------------------------
What else do you call "accounting judgement?" The common historic cost based accounting is just a "professional opinion", and in rapidly changing technology markets, straight line deprecitions for 20 years do not make any sense at all.


----------------------------------
>Why should, say, a Sprint repay its debt in full, if a Worldcom goes through a Chapter 11 filing that wipes out its debt? The post Chapter 11 Worldcom will have a huge economic advantage over the pre-Chapter 11 Sprint.

>>Interesting thought, but Sprint maintains a far lower cost of debt, and they can borrow more aggressively as the industry recovers. You are assuming the market remains in the dumps for years. nobody goes into bankruptcy for competitive advantage, look at the downside

------------------------------------

Didn't say Worldcom or Sprint would *want to* or *like to* go through Chapter 11. In Worldcom's case, they probably don't have a choice at this point, now that the bond holders have figured out there is no way in hell Worldcom can repay the $30 billion in full. Yes, the bonds don't come due for a while yet, but the writing is on the wall. Once Worldcom comes out with a clean balance sheet, it puts pressure on the ones left standing.

BTW, steel industry, airlines, etc have been through this situation before. Haven't you heard of the "prepackaged" bankruptcy filing, purely designed to clean up the balance sheet (and wipe out common stock holders, I should add). It is no picnic, but not something unheard of either.

As for customers, they know *today* that Worldcom is in deep trouble. Are they jumping ship in droves? Who do they jump ship to? Who is very healthy in the industry?

Shareholders have already been suing. Equipment vendors don't have a choice but to deal with the carrier(s) in question, Chapter 11 or not. SEC is already on their case ....


poster
poster
12/4/2012 | 10:21:43 PM
re: MFN Falls Into Chapter 11
excellent discussion. thanks for the elaboration on chapter 11, which I didn't really understand and which I'm sure gets much more complicated as well.

I wonder what the inherent depreciation of assests is in these carrier networks just from technology obsolecense year-to-year. putting a number on assests sounds like it would be a big guess, not to mention a rapidly moving (decreasing) target.

the real question is what is the fallout of all this on the industry. this is clearly a situation that most of the telecom players are in. what's the result for:

1) the carriers; overleveraged IXCs/CLECs as well as everyone else (RBOCs, ILECs...)

2) the hardware vendors

3) the customers

it would seem that all this industry wide 'sheet balancing', particularly if the carrier has a large degree of freedom to pick and choose which debts it honors and which it doesn't, would place some strain and certain creditors or classes of creditors. that's also got to put strain on those who don't do it as someone mentioned before. it's not like it's one or two or even three smaller players doing this. it's a good portion of the industry.

this has to have major ramifications for the equipment vendors as well. all of a sudden their contracts, or a portion of them, go away? who are the top 5 resellers of network gear on the gray market? where's the ebay of networking? I want to go work there.

this must be getting pretty routine for the customers. why jump ship when all the carriers say that it's business as usual? and where would you go where there isn't the real possibility of having to do it again? if anything it's a bargaining tool for the customer to renegotiate their contracts. again, has to have ramifications industry-wide.

and beyond telecom, this must put pressure on the market as a whole. who would buy bonds, stock, etc... when you face the very real possibility of getting zero. I understand it's always been a possibility but we're really talking odds here - now the odds (credit ratings, right?) seems to have quickly come to reflect reality. thoughts?
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