Sun Setting on 360networks ?
360networks Inc. (Nasdaq:
TSIX; Toronto: TSX.TO) fired another warning shot above Wall Street as the carrier announced it will not make a $10.9 million interest payment due today on its 12.5 percent senior notes (see 360networks Misses Debt Payment). The company has another 30 days to make the payment in order to avoid default consequences.
In a statement released this morning, 360networks said it wouldn’t be making this payment, in order to preserve cash as it reviews its options. In May, the company announced that it was discussing its funding issues with shareholders, but so far it has come up empty. The statement said that the company is now going to focus on other alternatives, including a restructuring of the company.
“There isn’t much more to say beyond our statement,” says Michelle Gagné, director of corporate communications for 360networks. “We are examining all of our alternatives. We’ve hired Lazard Freres to assist us in determining what is the best way to keep the company moving forward.”
But people on Wall Street are skeptical that 360networks will come up with a viable plan to stay afloat. They say that bankruptcy protection could be the company’s only alternative.
“Their bonds are worth 3 cents on the dollar,” says one bond trader at a major investment bank. “There’s little to no value left in the company. They ’re toast. I don’t see how they could pull out of this.”
The problems with the business are legion. Greenfield fiber networks require high startup costs and leverage for their buildouts. At the same time, demand for raw bandwidth and fiber access has declined. All of this has spelled trouble for the fiber backbone providers, as detailed in recent months (see Carriers Navigate Dark Waters). 360networks began as a carriers' carrier that had big plans to take on the world, literally. Using submarine DWDM gear from Alcatel SA (NYSE: ALA; Paris: CGEP:PA), long-haul and metro-area terrestrial DWDM gear from Nortel Networks Corp. (NYSE/Toronto: NT), core IP routers from Cisco Systems Inc. (Nasdaq: CSCO), and large-scale optical switches from Sycamore Networks Inc. (Nasdaq: SCMR), the carrier planned to build a fiber optic network that spanned the globe.
But over the last several months, financing has become harder and harder to come by, and 360networks was forced to slow down its spending and cut key parts of its original plan. On May 19th, it lowered capital spending guidance to $2.2-$2.4 billion in 2001, down roughly 39 percent from the prior guidance of $3.5-$4 billion. It also announced that it was delaying the development of its transpacific network and scaling back its funding plans for metropolitan areas across its network.
The company’s stock price tells the whole story. Over the last year, it hit highs of about $20 a share in September 2000. In February, as word started to leak out about the company’s financial problems, its stock dropped below $10. Today it drew closer to zero, trading down 0.09 (20.93%) at 0.34 a share in midday trading.
As problems worsen for 360networks, equipment companies that supply 360networks will likely feel the shock waves.
"It’s clear at this point that if 360networks owes you money, you’re not going to get much out of them,” says the aforementioned bond trader. "I wouldn’t even sell them a pack of ball point pens.”
Nortel, Cisco, and Sycamore will likely be affected most by these problems, says Alex Henderson, an analyst with Salomon Smith Barney in a note to investors this afternoon. But Rick Schafer, an analyst with CIBC World Markets says he sees Sycamore as bearing the brunt (see Sycamore Hit by Capex Cuts). Two of Sycamore’s biggest customers are Williams Communications Group (NYSE: WCG) and 360networks, he says. The company stated in its latest quarterly filing with the Securities and Exchange Commission that its sales to Williams had declined in absolute dollars and as a percentage of total revenues.
“A lot of people think of Williams as Sycamore’s biggest customer,” says Schafer. “But 360networks has been driving the bus for them lately. You have to believe that things could get a lot worse for Sycamore before they get better.”
Sycamore was trading down 0.67 (7.43%) at 8.35 a share in midday trading.
- Marguerite Reardon, Senior Editor, Light Reading