"For the investors who bankrolled PSINet's meteoric rise, the payoff is likely to be close to nil, analysts said. PSINet's other major unsecured creditors, in addition to the holders of $2.88 billion in senior notes, include equipment makers Nortel Networks Corp., Cisco Systems Capital Corp., Lucent Technologies Inc., and network providers Broadwing Communications Service and Metromedia Fiber Networks Services."
Fear of Telebomb Fallout
Crashing Firms' Debt Spreads the Ache
By Kathleen Day and Dina Elboghdady
Washington Post Staff Writers
Saturday, June 2, 2001; Page E01
PSINet Inc. yesterday joined the list of telecommunications upstarts that in just a few short years have gone from explosive growth to bankruptcy, adding billions to the massive amount of telecom debt that will end up in default or will need to be restructured.
This telecom meltdown is threatening profits at banks, insurance companies, mutual funds, private investment pools and a host of other lenders.
"Telecom debt is a big problem," said Abraham Gulkowitz, chief global strategist for corporate finance at Deutsche Banc Alex. Brown. He said it will be the major difficulty that lenders will struggle with this year. "It's in everyone's portfolio and it's going to be a longer workout than people realize. It is the real estate crisis and the leveraged-buyout crisis of this cycle."
In its bankruptcy filings, PSINet said it had liabilities of $4.3 billion, of which $2.9 billion is in publicly traded bonds.
Industry analysts estimate that the total amount of telecom debt is between $400 billion and $650 billion. About one-fourth of that is high-risk debt -- so-called junk bonds and the like -- of which $20 billion to $30 billion could end up in default or restructured within 12 to 18 months, said Jon Savas, high-yield telecommunications analyst for Merrill Lynch & Co.
Telecom debt-holders are likely to recover fewer cents on the dollar than in typical bankruptcies, according to analysts. "These are start-up companies that didn't have much in the way of assets or a business, and the physical equipment depreciates quickly," Savas said.
The good news is that the debt is spread fairly evenly throughout the financial system, in sharp contrast with the real estate slump of the early 1990s, when much of the debt was held by banks.
"It's not enough to sink the banking industry, but it's enough to make some banks potentially miss their earnings targets," said Marni Pont O'Doherty, an analyst at Keefe, Bruyette & Woods.
The fact that telecom debt is so widely held, however, makes it harder for regulators and analysts to predict precisely how the bankruptcies will ripple through the economy.
"It could mean, when it comes down to debt restructuring, instead of having a few big banks that are savvy and have been through this process before, you have lots of smaller investors, many of whom are relatively inexperienced and have a different set of priorities than larger holders," said Tanya Azarchs, bank debt analyst at the debt-rating company Standard & Poor's.
The telecommunications lending boom began in the mid-1990s, when Congress opened the door for new firms to compete with the established Baby Bell telephone companies for local service. Investors, lured by the prospect of unbridled technology growth, threw hundreds of billions of dollars at scores of businesses.
PSINet was one of those companies. It raised billions to fund a buying spree that included the purchase of 76 companies. Its goal was to build a global fiber-optics network to provide business with Internet access and services. Numerous other telecom companies also raised money for ambitious initiatives, convinced that demand would continue to boom.
"There was a disconnect, a cascade of false market signals, where everyone was looking to everyone else," said Scott Cleland of the Precursor Group, a research company. Rising stock prices made lenders more willing to extend credit, and that willingness in turn helped propel stock prices. "No one wanted to be the guy who said the emperor has no clothes," he said.
In 2000, telecom companies issued nearly $76 billion in new debt, compared with $19 billion in 1996, according to Thomson Financial Securities Data.
All that money led to the construction of too many networks. A number of companies were constructing the type of networks that PSINet founder William Schraderpioneered. Unused underground fiber glutted the market and drove down prices.
"Back when a lot of money was flowing into this market, everyone anticipated an exponential curve in growth of bandwidth demand, but what we've seen is linear growth," said David Inns, a partner at Diamond Cluster International.
Amid this uncertainty, Wall Street tightened the flow of financing to telecommunications firms, and their stocks plummeted. PSINet's stock, which peaked at $60 a share in March 2000, was deemed worthless by company executives this year, shortly before Nasdaq delisted it in April.
"We are not finished with the shakeout period in this industry," said telecom analyst Aryeh Bourkoff at UBS Warburg. "We are going to be in this funk for another year to six months, with only the highest-quality companies able to be financed."
washingtonpost.com
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PSINet Heads to Bankruptcy Court
Crushed by $3 Billion Debt, Internet Firm Seeks Buyers for Assets
washingtonpost.com
By Yuki Noguchi
Washington Post Staff Writer
Saturday, June 2, 2001; Page E01
PSINet Inc., the Ashburn-based Internet provider that capitalized on the telecommunications boom, said yesterday that it had filed for bankruptcy protection, becoming the latest casualty in an industry downturn.
The company had been warning since early April that it would likely file for Chapter 11 protection from its creditors. For months, it has been selling off pieces of its worldwide enterprise in a bid to stave off a final crunch from interest payments on nearly $3 billion in debt.
The company said it will continue to operate on a shoestring budget and a scaled-down staff of 4,480 people as it seeks buyers for all or part of what business remains.
In its filing, made late Thursday night with the federal bankruptcy court in the Southern District of New York, the 12-year-old firm listed total liabilities of $4.3 billion, of which $2.9 billion is publicly traded debt. The company counted $2.2 billion in assets, which include an extensive communications network; a sprawling, 204,000-square-foot campus in Loudoun County; and the rights to name Baltimore's football stadium.
The bankruptcy filing involves PSINet and 24 of its U.S. subsidiaries, as well as four of its units in Canada. The company's businesses in Asia, Europe and Latin America, as well as its Metamor consulting business, have not filed for bankruptcy protection because they have enough cash to continue operating independently, a PSINet spokesman said.
PSINet's troubles are common among telecommunications upstarts. Too many tried to enter the market at once, driving prices down and running up debts. In recent months, companies such as Teligent Inc., WinStar Communications Inc., E.spire Communications Inc. and NorthPoint Communications Inc. all have filed for bankruptcy.
PSINet "bit off more than they could chew, and the debt is coming back to bite them," said Riyad Said, an analyst with Friedman, Billings, Ramsey & Co., based in Arlington.
PSINet isn't likely to find a single buyer; it's more likely that its assets will be snapped up by several bargain-hunting telecom firms, he said.
"Our existing capital structure did not permit us to respond to the rapid changes in our markets," PSINet's president and chief executive, Harry G. Hobbs, acknowledged in a statement announcing the filing. The company will "continue to deliver the reliable service upon which our customers depend," as its banker, Dresdner Kleinwort Wasserstein Inc., considers PSINet's options, he said.
Under its strong-willed founder, William Schrader, PSINet built a telecommunications empire that sold a broad range of services, from basic Internet dial-up access to high-speed connections and wholesale volume on high-capacity fiber-optic networks. PSINet'sstature reflected an enthusiasm for technology that fueled a long economic boom, and created a cadre of technology stars in the Washington area. At its height, PSINet acquired 76 companies over the span of three years, and it employed 10,000 people last year. In 1999, the company agreed to pay $93.5 million over 20 years to have its name emblazoned on the Baltimore Ravens' stadium.
All that has unraveled.
In late April, Schrader was stripped of his position by PSINet's board of directors. PSINet still owes the Ravens $79.1 million, and the two parties aren't sure whether the stadium will retain its name. Shares of PSINet stand at a dismal 5 cents, far off of their high of $60 per share in March 2000.
The company is now beginning to dismantle itself. The Canadian firm Telus Corp. signed a letter of intent to purchase PSINet's Canadian operations in a deal expected to be finalized next week, according to Jim Peters, general counsel of Telus. Peters declined to comment on the value of the acquisition, but said the sale price is well below $100 million.
PSINet, which yesterday said it has no plans to lay off more employees, has about $300 million in cash to finance its operations. Even without the burden of bond interest payments, the company is burning though $15 million a month, said William J. Perlstein, the lawyer representing PSINet in its bankruptcy proceedings. By comparison, the company spent $81 million per month more than it took in, on average, during the second half of last year.
For the investors who bankrolled PSINet's meteoric rise, the payoff is likely to be close to nil, analysts said. PSINet's other major unsecured creditors, in addition to the holders of $2.88 billion in senior notes, include equipment makers Nortel Networks Corp., Cisco Systems Capital Corp., Lucent Technologies Inc., and network providers Broadwing Communications Service and Metromedia Fiber Networks Services.
"You can be very, very sure it's going to be painful for the bondholders," said Ulric Weil, a senior analyst at Friedman, Billings.
Staff writers Cynthia L. Webb, Amy Joyce and Peter S. Goodman contributed to this report. |
