Winstar Falls From The Sky

Short on cash, the broadband backbone builder defaults on an interest payment, files for Chapter 11 bankruptcy protection and sues its primary equipment vendor. It's all in a weeks work at Winstar.

by Jim Wagner and Ryan Naraine of internetnews.com [April 19, 2001]

Officials at Winstar Communications, Inc. announced early this week that the broadband backbone-building company could not meet its aggregate interest payment on $75 million in senior debt securities, which were due at the close of business Monday.

The company also missed several extensions granted over the past week-and-a-half by Lucent Technologies to make payments, according to Mary Lou Ambrus, a spokesperson for the Murray Hill, NJ-based equipment manufacturer.

"Indeed, Winstar is both in breach of their financial covenants and a payment default with us," Ambrus said. "We're clearly saddened by this latest development."

With losses mounting, the company looked for a savior in the form of Qwest Communications, which was rumored to be looking for a wireless arm to compete with the likes of Verizon Communications, Sprint Corp. and AT&T Corp. But Winstar's hopes were quashed when Qwest issued a statement saying it was most definitely not looking to acquire the troubled wireless carrier, forcing Winstar executives to lay off 2,000 employees to cut costs.

Stop the clock

With mounting debt and creditors lining up with outstretched hands, Winstar Wednesday filed a $10 billion lawsuit against Lucent Technologies for allegedly violating a vendor financing agreement.

Winstar accused the telecom equipment giant of failing to meet obligations of a supply agreement, which Winstar said forced it to seek protection from creditors by filing for bankruptcy.

Winstar also filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court for the District of Delaware Wednesday morning. The NASDAQ exchange also halted trading in Winstar stock this morning while it sought additional information on the company's financial position.

With plans to reorganize and restructure its balance sheet under court protection, Winstar said it had raised $75 million in debtor-in-possession emergency financing with a consortium of banks to keep operations running smoothly.

The group of banks includes CIBC, Citicorp, Credit Suisse First Boston, The Bank of New York and The Chase Manhattan Bank and the company said the amount of the emergency funding could be increased $300 million if certain conditions are met.

In the lawsuit against Lucent, Winstar is seeking $10 billion in damages for the equipment maker's alleged breach of obligations under a strategic partnership between the two sides.

Winstar charged that Lucent, which faces regulatory scrutiny over its accounting practices regarding equipment sales, has some questions to answer regarding its vendor financing transactions. "Lucent breached its agreement with Winstar and injured Winstar's ability to complete its broadband network," the complaint said.

Winstar said its ability to emerge from Chapter 11 reorganization as a successful operating entity is not contingent on the receipt of any damage award in this lawsuit.

Chief executive officer, William Rouhana Winstar, said Winstar expects to emerge from the bankruptcy proceedings with a new balance sheet with significantly less debt.

"While this was a very difficult decision to make, given the current circumstances, we determined that we needed to take decisive action for our employees, customers and creditors, to maximize the value of our business," he added.

Winstar paid for its worldwide domination through the funding of many capital venues available up until last year, burning through nearly $175 million a month in 2000.

Hungry like the wolf
The company holds the largest block of fixed wireless spectrum in the world, with spectrum licenses blanketing the U.S., Japan and Europe.

Winstar Communications Inc., which started life as a fixed-wireless CLEC and whose management wants the company to become an ASP wire its wire-free broadband network spent $161 million for 896 licenses last year.

Winstar paid for its airwaves, microwave and fiber buildout through the funding of many capital venues available up until last year, burning through nearly $175 million a month in 2000.

Winstar said the bankruptcy proceeding would not affect its day-to-day operations.

When the market deflated last year, the company belatedly pursued customers to shore up its mounting losses. According to a report issued by Goldman & Sachs, it's a flawed trend taken by many competitive local exchange carriers.

"For some carriers, the capital structure does, or will, represent a problem, and solutions should be sought before the wolf is at the door," the report said. "The CLEC model works, but the capital structure of some carriers represent an impediment to its success."

—End