Global Crossing Files for Chapter 11

By ELIZABETH DOUGLASS

Jan. 29, 2002 12 AM PT

TIMES STAFF WRITER

Global Crossing Ltd., which built the world’s largest communications network under the ocean floor, sank into bankruptcy Monday under the weight of more than $12 billion in debt.

The Chapter 11 filing by the Beverly Hills-based company is the largest by a U.S. telecommunications firm, and a huge setback for founder and Chairman Gary Winnick, a feisty former bond trader who was crowned the richest man in Los Angeles in 1999 when his Global Crossing stake grew to be worth $6 billion.

Winnick’s push to build a vast global network was not ill-conceived, just ill-timed, analysts say. The fiber-optics web may have ended up with extra capacity and overwhelming debt, but now it represents a near-steal for whoever buys it at a fraction of its cost.

That buyer may be an investment group led by Hong Kong billionaire Li Ka-shing that, as part of the bankruptcy filing, plans to pump $750 million into Global Crossing in an effort to keep it afloat. But that was little consolation for the company’s creditors and shareholders, who stand to recover little, if any, of their investments.

“This is a complete debacle . . . everyone’s worst nightmare,” said Patrick Comack, an analyst at Guzman & Co. “It’s awful for debt holders. It’s awful for shareholders. It’s a shame.”

Winnick, who will stay on as chairman for now, declined to comment. Global Crossing Chief Executive John Legere called the bankruptcy filing--the fifth-largest in U.S. history--”a hard decision.”

“The company at this level and size is just not able to handle the debt,” said Legere, the company’s sixth CEO in the last 4 1/2 years.

In its filing, Global Crossing said it had $12.4 billion in debt and assets of $22.4 billion. Its largest creditors are investors who purchased $6 billion in bonds and other debt securities and a group of 81 banks led by J.P. Morgan Chase and Citibank, owed about $2.25 billion, Legere said.

Other creditors are a who’s who of telecommunications equipment makers, including Lucent Technologies Inc., Nortel Networks Corp., Cisco Systems Inc. and Alcatel, as well as large phone companies such as SBC Communications Inc. and Verizon Communications Inc.

Shareholders who held $55 billion worth of Global Crossing stock at its peak will get nothing.

The company’s remaining 8,000 employees, including several hundred in Beverly Hills, will not be affected, Legere said. The thousands of recently laid-off workers, however, will not receive severance and other benefits initially promised them.

Comack and other analysts had hoped Global Crossing could limp through the downtrodden market for telecommunications services by selling off units and slashing costs.

Last year, Global Crossing cut more than 3,000 jobs, closed dozens of offices, sharply reduced spending and moved to pay preferred dividends in stock instead of cash to save money. But in the end, it wasn’t enough.

Legere said the company’s bankruptcy filing is just part of a plan aimed at rescuing Global Crossing. The central component is a tentative agreement with Asian powerhouses Hutchison Whampoa Ltd.--controlled by Li--and Singapore Technologies Telemedia, which have agreed to pay $750 million for a majority stake of undefined size in Global Crossing.

If negotiations go well, Legere said, Global Crossing could emerge from Bankruptcy Court before the end of the year. Under the worst-case scenario, Global Crossing’s assets could be liquidated and its network shut down, leaving customers to line up space on competing networks.

Both of the prospective Asian saviors already have close ties to Global Crossing and its affiliated companies through overseas ventures. Hutchison owns half of Hutchison Global Crossing, a communications provider in Hong Kong, while Singapore Technologies owns half of StarHub Crossing, a carrier in Singapore.

Analysts say both companies probably see the investment as a way to secure relatively cheap access to worldwide communications networks, which they need to serve their international corporate customers. With the investment, the companies also would pick up Global Crossing’s 59% stake in Asia Global Crossing, a separate company that runs a valuable communications network in Asia.

Some believe the core assets at Global Crossing--a nearly complete network that covers more than 100,000 miles and connects 200 major cities in 27 countries--could draw other bidders in Bankruptcy Court.

The current deal with the Asian firms is not exclusive and still must win the approval of various stakeholders and the Bankruptcy Court. Other companies, such as Deutsche Telekom, WorldCom, SBC Communications or Verizon Communications, may weigh in with offers, according to analysts.

“It’s not an unreasonable expectation,” said Tom Soja, who heads Boston-based telecommunications analysis firm T. Soja & Associates. “Anyone with cash, you can’t rule out as a bidder, particularly if they have customers who need that worldwide connectivity.”

The prerequisite for any buyer, though, will be a dramatic reduction in debt, which currently costs Global Crossing about $600 million a year in interest.

“A lot of people are getting hurt by this, but ironically, the fact that they may not have debt payments anymore would make them a strong competitor in the future,” said Soja, whose firm has worked for some of Global Crossing’s bankers, as well as some of the company’s competitors.

But even if Global Crossing emerges from bankruptcy protection, as upstart provider Covad Communications did recently, it’s not likely to help restore Winnick’s once-stellar reputation as a Midas-like businessman.

That image helped Winnick, who worked in Michael Milken’s once-vaunted junk-bond operation at Drexel Burnham Lambert in the 1980s, raise unprecedented amounts of money for the construction of Global Crossing’s network. In all, he raised nearly $20 billion, including money from public stock and debt offerings as well as bank loans.

Fueled by that cash and a stock price that soared along with many other technology newcomers, Global Crossing became the first company to build a vast undersea fiber-optic network without government subsidies or the use of giant quasi-governmental consortia.

The tiny company made itself impossible to ignore by embarking on a buying spree that included the purchase of long-distance company Frontier Communications, England’s Racal Telecom, Cable & Wireless’ Global Marine cable-laying unit and IPC Communications, a company with strong ties to Wall Street customers.

At one point, Global Crossing made a brash bid to buy U.S. West, a Baby Bell local phone company that ultimately went to Qwest Communications--leaving Global Crossing with a lucrative break-up fee, and giving stockholders (including Winnick) a chance to cash in $3.5 billion worth of Global Crossing stock.

But there were signs of trouble along the way. Winnick proved difficult to please, and it showed in a revolving door of executives so active that one analyst dubbed Winnick “the George Steinbrenner of telecommunications.”

Winnick also has drawn stinging criticism for selling huge chunks of Global Crossing shares--grossing more than $600 million on sales of 43 million shares--before the company’s fortunes, and its stock price, went into a deep dive. Other top executives also have pocketed millions along the way.

Shareholder lawsuits have piled up, with 13 pending cases to date, most of them focused on alleged improprieties in the way Wall Street firms handled Global Crossing’s public offerings.

Trading of Global Crossing shares was halted Monday morning. The shares fell 23 cents, or 45%, to 28 cents in early trading before U.S. markets opened. Shares closed down 21 cents to 30 cents on the New York Stock Exchange. Global Crossing’s stock, which traded at $62 at its peak, has fallen more than 95% in the last year, with the price languishing below $1 for the last few months.

Global Crossing is expected to post losses of $2.5 billion for 2001, bringing cumulative losses above $4.8 billion. The company will announce its year-end results next month.

Global Crossing Files for Chapter 11

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