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 bemaking this payment, in order to preserve cash as it reviews its options.In May, the company announced that it was discussing its funding issues withshareholders, but so far it has come up empty. The statement said that thecompany is now going to focus on other alternatives, including arestructuring 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 allof our alternatives. We’ve hired Lazard Freres to assist us in determiningwhat is the best way to keep the company moving forward.”

But people on Wall Street are skeptical that 360networks will come upwith a viable plan to stay afloat. They say that bankruptcy protection couldbe the company’s only alternative.

“Their bonds are worth 3 cents on the dollar,” says one bond trader at amajor 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 networksrequire high startup costs and leverage for their buildouts. At the sametime, demand for raw bandwidth and fiber access has declined. All of thishas spelled trouble for the fiber backbone providers, as detailed in recentmonths (see Carriers Navigate Dark Waters).360networks began as a carriers' carrier that had big plans to take onthe 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 thatspanned the globe.

But over the last several months, financing has become harder and harderto come by, and 360networks was forced to slow down its spending and cut keyparts of its original plan. On May 19th, it lowered capital spendingguidance to $2.2-$2.4 billion in 2001, down roughly 39 percent from theprior guidance of $3.5-$4 billion. It also announced that it was delayingthe development of its transpacific network and scaling back its fundingplans for metropolitan areas across its network.

The company’s stock price tells the whole story. Over the last year, ithit highs of about $20 a share in September 2000. In February, as wordstarted to leak out about the company’s financial problems, its stockdropped 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 supply360networks will likely feel the shock waves.

"It’s clear at this point that if 360networks owes you money, you’re notgoing to get much out of them,” says the aforementioned bond trader. "Iwouldn’t even sell them a pack of ball point pens.”

Nortel, Cisco, and Sycamore will likely be affected most by theseproblems, says Alex Henderson, an analyst with Salomon Smith Barney in anote to investors this afternoon. But Rick Schafer, an analyst with CIBC World Markets says he seesSycamore as bearing the brunt (see Sycamore Hit by Capex Cuts). Two of Sycamore’sbiggest customers are WilliamsCommunications Group (NYSE: WCG) and 360networks, he says. The companystated in its latest quarterly filing with the Securities and ExchangeCommission that its sales to Williams had declined in absolute dollars andas a percentage of total revenues.

“A lot of people think of Williams as Sycamore’s biggest customer,” saysSchafer. “But 360networks has been driving the bus for them lately. You haveto believe that things could get a lot worse for Sycamore before they getbetter.”

Sycamore was trading down 0.67 (7.43%) at 8.35 a share in middaytrading.

- Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com