Redback Asks Creditors to Swap Debt for Equity

Redback Networks Inc. unveiled a financial restructuring Monday that would see creditors take almost full ownership of the struggling telecommunications equipment maker.

Redback, based in San Jose, said the move was needed to shore up its balance sheet, but it warned that it could file for Chapter 11 bankruptcy protection if its proposed debt-for-equity swap is rejected.

The network gear maker’s shares, already battered amid the long-running technology and telecommunications slumps, fell 41 cents to close at 50 cents on Nasdaq after the announcement.

Redback said it had reached an agreement with holders of 67% of its 5% convertible subordinated notes due in 2007 to exchange the notes for common stock.

The deal, which provides for the exchange of common stock for $467 million in debt, would give the note holders about 95% of Redback’s common stock.

Existing common shareholders would initially retain about 5% of Redback’s common stock after the deal, with the right to increase their stake to about 15%.

Completion of the deal requires a minimum tender of 98% of the outstanding principal amount of the notes, approval of existing shareholders and regulatory approval, Redback said.

SG Cowen analyst Christin Armacost said in a research note those approvals are not a given. She added that despite the potential recapitalization, she remained concerned about Redback’s ability to engineer a successful comeback.

Redback President and Chief Executive Kevin DeNuccio said the restructuring would improve the company’s balance sheet and cash flow.

“This really completely fixes the company’s capital structure,” DeNuccio said. “It enables us to be, with our restructuring, a cash-flow-positive business by the end of the year.”

Last week, Redback, a smaller rival of Cisco Systems Inc. and Juniper Networks Inc. that makes gear to deliver high-speed Internet services, warned that its second-quarter sales would fall below analysts’ expectations.