Heard in Asia: Global Crossing's Fate Rests With Its Bankers
January 21, 2002
By HENNY SENDER
Staff Reporter of THE WALL STREET JOURNAL
The breathing space Global Crossing and its Asia Global Crossing unit obtained from bankers at the end of December has only a few more weeks to run.
Since agreements on more flexible terms to keep the cash-strapped company from violating existing conditions on its loans were announced, the bonds rallied in secondary market trading and the share prices of both stocks climbed. Positive sentiment also was generated by the news that potential conflicts of interest have been minimized by having John Legere, who had been heading both companies, step down as chief executive officer of Asia Global Crossing.
Yet, the optimism may prove premature. The fate of both companies, along with many other telecommunications companies, lies with the banks unless a white knight soon materializes. So clues to the next step in the drama may lie more in the thinking of the banks than in any further actions at the company. And that thinking has been heavily influenced by the disastrous outcome of recent auctions for other assets of telecom companies.
Global Crossing has long been considered the blue chip of emerging telecom companies. It is also the one whose network is the furthest along. Yet that may matter less than the fact that it continues to have a voracious appetite for cash. And while it has slashed its spending, its planned capital expenditure for this year will be about $1.5 billion, according to a recent conference call, despite the virtual completion of its network.
"It is clear that the most important asset of these companies is the cash on their balance sheets," says one restructuring expert familiar with both companies. "The reason that the waiver is so short is to prevent the company from squandering their cash. The banks have learned their lesson: A business plan that burns cash allows the borrower to burn up their main asset."
1Global Crossing Won't Honor Loan Pact to Asia Subsidiary (Dec. 21, 2001)
2Global Crossing Ratings' Slide Fuels Concerns Over Liquidity (Dec. 13, 2001)
3Global Crossing Warns of Lower Results; Firm Enters Merger Talks With Asia Unit (Oct. 5, 2001)
There have been many recent developments underscoring just how ugly the economics have become. Reach, jointly owned by Pacific Century CyberWorks and Telstra of Australia, acquired the Asian operations of Level 3 Communications in exchange for merely assuming about $170 million in outstanding construction commitments in mid-December. (At the time, Level 3 said it would focus on the U.S. and Europe. By contrast, most analysts believe that the most valuable part of Global Crossing is the Asian piece, which is why any possible white knight, such as Li Ka-shing, is likely to come from the region.)
Meanwhile, Winstar, a U.S.-based company that estimated the value of its assets at $4.9 billion when it filed for protection under Chapter 11 of the U.S. Bankruptcy Code in April, was recently sold for $38 million. That illustrates just how quickly asset values have disappeared. Banks, led by J.P. Morgan Chase and the Citibank unit of Citigroup, which provided post-petition finance, lost almost all their money in an outcome that was almost unprecedented. This is because such so-called debtor-in-possession lending almost always takes absolute priority over any other claims.
Another reason analysts speculate the banks have granted Global Crossing a temporary reprieve -- it expires in mid-February -- is to postpone any write-downs until 2002. The last quarter of 2001 was particularly devastating to J.P. Morgan Chase, Global Crossing's lead bankers. The bank last week announced earnings that were a fraction of consensus estimates as a result of its exposure to Enron and Argentina.
Global's prospects by themselves are unlikely to convince the banks to be kind. "Of the companies we place in the hell category, we believe that Global Crossing sits on the lowest rung," say analysts from Salomon Smith Barney of Citibank in a recent report. "Revenue in the third quarter was 20% below our expectations; adjusted earnings before tax, depreciation and interest payments was $47 million, down more than 80% from our original expectations due to lower-than-anticipated sales. This represents a problem not only for the third quarter but going forward. We have concerns about GX's inherent viability as a business, given our lack of visibility on the company's revenue and cash-flow streams." The analysts also excoriate management for affirming guidance for the third quarter shortly before missing targets by "such a large margin."
The report was addressed to bondholders but applies even more to shareholders who rank below bondholders in any possible future filing for bankruptcy protection. Shareholders, if recent examples are anything to go by, are generally wiped out. They were already dealt one blow in mid-December when Global Crossing announced it wouldn't be paying out dividends to save $46 million each quarter. In any case, their circumstances are very different from those of management, many of whom have sold down their own holdings in the stock. Senior officials often receive new incentive packages after a filing, and in this case, could even be part of a consortium injecting capital following such a potential filing.
Of course, people have lost money in the past betting that Global Crossing would file for protection. In November, when Global was due to make a payment on its debt, many hedge funds went short on the stock, betting that the company would default. But the company paid out and the hedge funds closed out their positions at a loss. Global Crossing has another payment deadline in February.
Write to Henny Sender at henny.sender@wsj.com4
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