Tuesday August 7, 1:41 pm Eastern Time
Covad to File for Bankruptcy
By Jonathan Stempel
NEW YORK (Reuters) - High-speed Internet access provider Covad Communications Group Inc. (OTC BB:COVD.OB - news) said on Tuesday it expects to file for bankruptcy protection by mid-August and is in talks with bondholders to eliminate its $1.4 billion debt load.
Money-losing Covad, which is based in Santa Clara, California, is one of a handful of cash-hungry telecoms to face pressure from bondholders.
These bondholders are trying to keep telecoms from spending in ways they deem wasteful, before any bankruptcy filing, which often leaves bondholders with pennies on the dollar. It is a novel strategy, legal experts said, because companies normally owe their main duty to shareholders before any filing.
Under Covad's restructuring, orally agreed Monday night, the company would pay bondholders 19 cents cash per dollar of face value for their bonds -- higher than where they have recently been trading -- and preferred stock convertible into a 15 percent equity stake, or 33 million shares.
``It's a tremendous outcome,'' said David Rosner, a partner at New York-based Kasowitz, Benson, Torres & Friedman LLP, which represents a bondholder committee that in April publicly pressured Covad to restructure.
``It's exactly what the bondholders wanted when they said, 'We want you to restructure and not leave bondholders with one or two cents on the dollar,''' he said.
Covad would join PSINet Inc., Teligent Inc., 360networks Inc, Viatel Inc., Winstar Communications Inc. and several other emerging telecoms to seek bankruptcy protection this year.
``The main issue was getting out of debt,'' Charles Hoffman, Covad's chief executive, said in an interview. ``In one fell swoop, this restructuring will take us out of debt.''
In a statement, Covad Chairman Chuck McMinn said Covad would need $200 million more in cash to become cash flow ''positive,'' which he expects by the third quarter of 2003.
After reaching 76 cents, shares of Covad traded Tuesday afternoon on the Nasdaq bulletin board at 60 cents, up 10 cents. They have fallen 97 percent in the last year.
DEREGULATION
Many telecoms sprouted following industry deregulation brought about by the Telecommunications Act of 1996. But customer demand never met expectations, and many telecoms ran out of cash.
Covad is the last big independent digital subscriber line provider still above water, after bankruptcy filings this year by Rhythms NetConnections Inc. (OTC BB:RTHMQ.OB - news) and NorthPoint Communications Corp. NorthPoint later folded.
``The only thing that changed was the capital markets, which started rewarding companies with profits as opposed to companies rapidly growing their businesses,'' said Hoffman, who became Covad's chief executive on June 25.
Hoffman said holders of ``well over'' half of Covad's bonds have agreed to a restructuring, and said ``we anticipate two-thirds very shortly.''
Covad said it expects to file for a voluntary prenegotiated reorganization under Chapter 11 of the U.S. Bankruptcy Code in Delaware. It said it expects its operating companies will not seek protection, and will provide normal service. Covad said it had 333,000 customers in service on its network as of June 30.
LEGAL GRAY AREA
In pushing for change before bankruptcy, bondholders are charting uncertain legal territory, the point when a company's fiduciary duty shifts to include them as well as shareholders. Bondholders have greater rights in a bankruptcy proceeding.
Last Wednesday, Rhythms filed, but only after obtaining consents from holders of more than 60 percent of its bonds.
The same day, a holder of $70 million of bonds of Mpower Communications Corp. (NasdaqNM:MPWR - news) sued that Internet access and telephone services provider, seeking a declaration that Mpower was ``insolvent or in the vicinity of insolvency.''
Rosner, whose firm represents other bondholders in similar cases, said news on Rhythms and Mpower convinced some Covad bondholders to okay Monday's agreement. He also said other telecoms may expect more pressure from bondholders.
``The time is now for these companies to sit down with bondholders, rather than wait for cash to run out,'' he said.
Hoffman said Covad, ``never considered liquidation.''
The company expects to pay out $283.3 million to bondholders, including $26.5 million in cash to holders of its $215 million of 12.5 percent senior notes maturing in 2009.
After the payout, Covad said it will have about $250 million of cash on a pro forma basis as of June 30, 2001, enough to run its business into early 2002. It said it expects to emerge from bankruptcy by January 2002.
Moody's Investors Service rates Covad's bonds ``Caa3,'' its third lowest junk grade, while Standard & Poor's rates them ''CCC,'' its fourth lowest other than default. |
