Backbones Restructure

Metromedia Fiber Networks did not pay interest on $975 million of loans. Meanwhile, XO Communications expects creditors to allow a debt-for-equity swap that will bring it out of default and eliminate the shares of current equity holders.

by InternetNews.com Staff [April 17, 2002]

Struggling long haul fiber carrier Metromedia Fiber Network, Inc. has all but made a bankruptcy filing official after it missed a payment on $975 million worth of corporate loans Monday.

The New York-based Metromedia had worked out a 30-day grace period after it skipped a $30 million payment to an affiliate of Verizon Communications, which holds the notes.

With about $3.3 billion in debts and dwindling cash reserves amid a brutal shakeout among telecommunications startups, the company is in ongoing discussions with creditors over restructuring all its liabilities. It has said a bankruptcy filing is to be expected. Much of the timing depends on how the senior and secured classes of bond and note holders want to proceed.

The news comes two weeks after the company missed payments on about $674 million worth of bonds and notes, a default triggered by a missed payment to Nortel Networks on a $231 million note.

The following business day, its two senior executive, Mark Spagnolo, president and chief executive officer, and Randall Lay, senior vice president and chief financial officer resigned.

The board of directors named John W. Gerdelman as president and chief executive of the company and Robert F. Doherty as executive vice president to take their places immediately to help the debt-laden telco restructure.

The prior and latest defaults further complicate a $611 million financing package that it arranged last fall after it missed a payment on part of that deal, triggering cross defaults on other notes.

Metromedia officials have said they are restructuring their operations, to include a possible $50 million sale of their Internet exchange, PAIX.net, Inc., along with an equity investment in the buyer's company. Escrow payments on the transfer at closing would cost roughly $4.5 million, while the remaining assets would be used to pay off debts. The company blames the "general downturn in the global communications industry" for its current situation.

Shares of Metromedia were trading at around 5 cents Tuesday as its annual report was due.

XO will restructure
XO Communications, Inc. says despite the fact that its forbearance agreements with its creditors have expired, the company expects its lenders not to take any action against the troubled broadband provider as it continues to work on a restructuring deal.

Strapped for cash, In January, XO reached a "definitive agreement" with Forstmann Little & Co. and Telefonos de Mexico S.A. de C.V. (TelMex), Mexico's largest telecommunications firm, on the terms of their previously announced intention to invest $400 million each in XO in exchange for new equity in the company.

Following the restructuring, Forstmann Little and TelMex will each own 39 percent of the company's outstanding equity. The remaining equity, other than that allocated to the company's employees, is expected to be held primarily by holders of the company's senior notes. Consequently, current holders of the company's equity securities are expected to lose substantially all of the value of their investment as a result of the restructuring.

XO has had trouble selling that deal, though, and has threatened to file to bankruptcy in an effort to pressure stockholders into accepting the Forstmann-TelMex offer.

In early March, the proposed deal became even murkier when billionaire investor Carl Icahn, who, along with two other unnamed parties hold $1 billion of XO's debt, urged stockholders to reject the Forstmann-TelMex offer.

Meanwhile, on Monday, XO's forbearance agreements with its creditors expired. Under the forbearance agreement, the lenders had agreed, subject to certain conditions, not to exercise their remedies under the credit facility with respect to certain cross default events and fourth quarter 2001 minimum revenue covenants.

"Presently, we are continuing our discussions with our lending institutions, holders of our senior unsecured notes and prospective investors—including the investment group being led by Carl Icahn. These actions are consistent with the terms of our definitive investment agreement with Forstmann Little & Co. and Telefonos de Mexico S.A. de C.V. which continues to be in full force and effect," the company said in a statement issued Tuesday morning.

"We are making progress in the negotiations with the Icahn-led investment group and we are in active discussions with the lending institutions under our senior credit facility and the senior noteholders with a goal of reaching an agreement on the terms of an investment and related balance sheet restructuring. As the lending institutions are actively involved with these discussions, they have indicated to XO that, despite the expiration of the forbearance agreement, they do not intend to take any additional action with respect to the enforcement of their rights under the secured credit facility so long as satisfactory progress on the restructuring continues to be made."

— End