WAN Services /

Bankruptcy becoming a new beginning

Restructured companies unload debt, refocus and try to survive in a tough marketplace.

By Michael Martin
Network World, 07/15/02

Metropolitan Ethernet pioneer Yipes last week became the latest in a growing list of competitive telecom providers to shed its formidable liabilities in Chapter 11 bankruptcy and emerge as a restructured company.

The trend of once-broken carriers leaving Chapter 11 as leaner, potentially more viable companies has benefits for customers who stuck by them. And more competitors in the telecom market should mean better pricing and a wider array of services across the market.

But there's no guarantee that these Chapter 11 survivors will succeed in the long term with business plans that aren't markedly different from the designs that led the companies into bankruptcy.

Those that have filed and emerged include Yipes, McLeodUSA, ICG Communications and Covad. Some - such as NorthPoint Communications and Rhythms NetCommunications - filed for Chapter 11 and were sold to other companies. And others, including XO Communications, Williams Communications and Global Crossing, have yet to have their bankruptcies resolved.

For companies with burdensome debts and liabilities, Chapter 11 might be the only path to obtaining further financing, says Nick Maynard, an analyst with The Yankee Group.

"I certainly think there will be more restructurings and failures down the road," Maynard says.

Even if investors have been burned by a firm once, they might invest in it again if they feel there's a chance it can succeed after eliminating its debt, he says.

It's no secret why so many telecom companies have filed for bankruptcy. During the late 1990s, they spent billions of dollars on network equipment and fiber in an attempt to reach as many markets and customers as possible.

The problem was that the demand for telecom services never matched the supply, prices for services bottomed out, and providers were left trying to meet the interest payments on their debt with lower-than-expected revenue.

In Yipes' case, the company didn't build any debt. But it signed long-term contracts for network equipment, fiber and access leases to multitenant buildings during the boom years of 1999 and 2000. When the telecom market began to decline in 2001, Yipes was stuck with fixed expenses that were out of line with the new market reality, says Dennis Muse, CEO of Yipes Enterprise Services. Muse says Yipes tried to renegotiate those supplier contracts to no avail and then filed for bankruptcy.

Yipes' senior management team recently formed a new company called Yipes Enterprise Services, buying most of the assets of the former Yipes Communications. The new company landed $40 million in a first round of funding led by Norwest Venture Capital, and bid for the original company's assets in 10 of its 13 markets, emerging as the highest bidder in all 10.

Norwest, which was also an investor in the original Yipes, still believes in the company's business plan of selling big bandwidth Ethernet services to small and midsize businesses, says Promod Haque, managing partner at Norwest.

Yipes' revenue was growing between 5% and 10% per month before the company filed for Chapter 11, Haque says. The problem was Yipes' high expenses. The new company has renegotiated every supplier contract, numbering in the hundreds, to bring down its expenses. Haque says that should be enough to make Yipes a success.

Muse says Yipes will get to a positive cash-flow position in its 10 remaining markets within 20 months. And the company won't need more than the $40 million first round of funding and an expected $13 million second round later this year to get there.

"Our focus now is going to be exclusively on the 10 markets we have today," Muse says. "We'll build them broader and deeper. We want to get to cash-flow positive before we think of taking our message elsewhere."

Yipes' transformation has helped restore confidence in the company.

"I feel better about them now," says Ed Nickerson, director of IT at LaSalle University, a Yipes customer in Philadelphia. "They seem to have secured some funding and their network is performing well for us."

When Yipes filed for bankruptcy, Nickerson and his IT team were concerned and had begun looking for possible alternatives in case Yipes' network went dark. Yipes did a good job of keeping the university updated on its bankruptcy, he says, and also kept its network running well during the proceedings.

Nickerson says he'd definitely consider signing a new contract with Yipes.

While some investors and clients might be willing to give a once-bankrupt company a second chance, Royce Holland, CEO of competitive local exchange carrier (CLEC) Allegiance Telecom, says that any company filing for bankruptcy is going to lose some trust. Allegiance is considered one of the few successful CLECs and has not filed for bankruptcy.

"People underestimate the effects of Chapter 11," he says.

Companies that file for Chapter 11 tend to lose management, customers and reputation, he says.

"I'm not sure that wiping out the debt through Chapter 11 strengthens them enough to be a viable player," he says.

Starting a new chapter
Bankruptcy has helped several competitive telecom companies improve their financial positions:

Company	Filed for Chapter 11	Emerged from Chapter 11	Debt eliminated
Yipes Communications	March 2002	July 2002	Negligible, but fixed long-term expenses were renegotiated.
McLeodUSA	January 2002	May 2002	$3 billion
Covad Communications	August 2001	December 2001	$1.4 billion
ICG Communications	November 2000	May 2002	$2.5 billion