Court OKs Global’s Plan to Wipe Out Obligations
Global Crossing Ltd., which collapsed under the weight of $12.4 billion in debts, won court approval Tuesday to wipe out its obligations for pennies on the dollar and to emerge from bankruptcy protection as a new company -- ready to compete aggressively, some say, against major long-distance carriers.
U.S. Bankruptcy Judge Robert E. Gerber in New York signed off on Global Crossing’s plan to sell 61.5% of its new stock to two Asian companies for $250 million and allocate remaining shares among four classes of creditors.
Approval of the plan also marks time for the company’s co-founder and chairman, Los Angeles financier Gary Winnick, who built the private worldwide fiber-optic network and is expected to be replaced once the company emerges from Chapter 11 in the next few months.
Winnick has come under intense criticism and investigations for the company’s woeful financial condition, hurt by questionable accounting, lavish spending and extravagant salaries and bonuses. He also cashed out more than $575 million in stock during the company’s heyday of the late 1990s.
Even though shareholders receive nothing under the court-approved plan and the stock is officially worthless, buyers bid up Global’s shares Tuesday by 1.6 cents to 3.1 cents in trading on the electronic Pink Sheet market.
The only significant hurdle left for Global is approval of the deal by the Federal Communications Commission. The agency is expected to decide by the end of March whether it will allow Hutchison Whampoa Ltd. in Hong Kong and Singapore Technologies Telemedia to control the operation, which counts the U.S. Defense and State departments among its 85,000 customers.
The company also faces federal probes into its accounting practices and possible insider trading, as well as a host of securities class-action suits. But the company said those issues should not hinder its emergence from bankruptcy protection.
The court’s approval makes Global the biggest operation on the growing list of telecommunications companies that have emerged from Chapter 11 with little or no debt. Among the others: McLeodUSA Inc., 360Networks Inc., Williams Communications Group Inc. and Mpower Holding Corp. Many analysts believe that the revived telecoms will further drive down prices.
“Global’s competitors are not going to be the least bit pleased about this,” said researcher Brownlee Thomas at Giga Information Group.
Indeed, Thomas said, Global probably will price its long-distance services just below those of major competitors such as Sprint Inc., financially troubled Qwest Communications International Inc. and WorldCom Inc., which also is operating under bankruptcy protection.
Analyst David Neil at research firm Gartner Inc. in Stamford, Conn., said Global Crossing could provide corporate discounts -- it doesn’t target residential customers -- of up to 20% and still have enough of a profit margin to make it a successful carrier.
“Clearly, this puts them in a good position,” Neil said.
Still, the telecommunications market remains beset by overcapacity. And Global has its own issues to contend with. “They still have to overcome the stigma of Chapter 11 and the nervousness of commercial customers over the telecom industry,” Neil noted. “They have to show they’re not going to screw up again and that they can manage the company.”
The bankruptcy filing eliminates $7.8 billion to $8.7 billion in debts. Remaining liabilities are primarily at its 59%-owned subsidiary, Asia Global Crossing Ltd., and at subsidiaries that were not under bankruptcy protection.
Under the plan, John Legere will continue as chief executive, a post he took over 13 months ago as the company was reeling from low demand in an industry choked with a glut of unused fiber-optic capacity.
Hutchison and Singapore Technologies will each have 30.75% of the new company. Banks will take 6%, along with $311 million in cash and $175 million in new debt securities to recover 22.7 cents on every dollar of their $2.25 billion in loans.
Other creditors won’t fare as well. Those with $3.8 billion in a subsidiary’s notes will get 3.2 cents on the dollar in a package consisting of nearly $4.6 million in cash, about $19 million in new notes and a 24.7% stake.
Those with $620 million in another subsidiary’s notes also will get 3.2 cents on the dollar. Their package consists of $739,200 in cash, $3.08 million in new notes and a 4% stake in the company.
Those with $1 billion to $1.9 billion in unsecured claims were split into two groups. Large creditors will get 1.4 cents to 1.9 cents on the dollar by sharing $706,800 in cash, $2.9 million in new notes and 3.83% of new stock. Small creditors, those owed less than $100,000 each, share in the lesser of $3 million in cash or 5% of their claims to get 4 cents on the dollar.
Winnick is trying to arrange a $25-million personal donation to a company pension fund by the end of the month to cover losses that certain employees incurred as the company crashed into bankruptcy in January, a source close to him said. He made the surprise pledge at a congressional hearing last summer.
Legere would not comment on the court’s ruling or his plans. In a news release, he called the court’s approval a “clear vote of confidence in our future.”
Legere has said that few customers have fled since January, and monthly financial statements filed with the court show that the company has $271 million of cash on hand at the end of October.
The company has been burning through more than $60 million a month from August through October, but should have enough to get out of bankruptcy protection, analysts and company executives have said. It lost $150 million in October on sales of $256 million.
The state-of-the-art fiber-optic Global Crossing network envisioned by Winnick, a former associate of junk bond advocate Michael Milken at now-defunct Drexel Burnham Lambert brokerage, encompasses more than 200 major cities in 27 countries.
Asia Global Crossing also has filed for bankruptcy protection with a plan to be acquired by China Netcom Communications Group Corp.
