e.spire respires but may expire

It's good news/bad news time for e.spire Communications. The good news is that many of e.spire's long-running problems have been fixed, its customers are being billed and paying their bills, and the carrier turned EBITDA-positive in the fourth quarter for the first time in its history.

The bad news is that e.spire may run out of money this month.

The CLEC, based in Herndon, Va., failed to make a $15 million interest payment last month on its $885 million debt and is negotiating with bondholders about extending the debt for the second time in less than a year.

“We have cash through the second half of March,” said a spokeswoman for e.spire. “We have 6000 customers — and they're paying customers. [CEO] George [Schmitt] is still negotiating with our bondholders to restructure the bonds and, separately, is working on a new senior secured credit facility.”

e.spire was at this same crossroad last July. At that time, e.spire received an extension on its old credit facility in return for a 0.5% increase in its interest rate. If e.spire can't arrange something with its bondholders, it may declare bankruptcy under Chapter 11 of the Bankruptcy Act.

“Chapter 11 would be pure speculation,” the spokeswoman said.

However, analysts say such a move is possible because it would allow e.spire to keep operating while it seeks buyers — either for the company as a whole or for its assets.

The irony is that things are starting to go right for e.spire after two years of corporate comic opera.

All three of its business units — the CLEC business, its network construction company and its Internet-hosting business — went EBITDA-positive in the fourth quarter. Its network costs decreased by $3.1 million for the fourth quarter and by $15 million for the year.

e.spire even hired 400 people in 2000. Schmitt, brought in last year by William Huff, e.spire's largest single investor, oversaw a 63% increase in revenues, the EBITDA-positive performance of 21 of e.spire's 28 markets and an apparent end to upper management problems.

Still, e.spire lost $97 million in the fourth quarter and $375 million for the year. Its stock price — relatively low at about $16 when the rest of the sector was booming — is now microscopic at 66¢. If e.spire can't get the price above $5, it faces delisting by the Nasdaq national stock market on April 2.

e.spire's fourth-quarter heroics may be too little, too late. The constant turmoil among upper management, the changes in focus and the long train of bad news — to say nothing of the debt — may be too much to overcome.

“Even if they're able to restructure the debt, it's not clear how far that will carry them,” said Charlie Ramsford, an analyst at New Paradigm Resources Group, a Chicago-based telecom research firm. “What probably will happen is, at some point, whether they file [for bankruptcy] or not, their assets will be acquired by somebody else — or some of them will be — to keep them going.”

e.spire has impressive assets. Its construction subsidiary, ACSI Network Technologies, designs and builds fiber-optic networks throughout the United States. Its revenues were up 81% for the fourth quarter, to $21.8 million, and 21% for the year, to $82.8 million. CyberGate managed to stay $100,000 on the right side of EBITDA, even though it got out of the dial-up Internet business to become a hosting and co-location company.

Some analysts speculate e.spire may consider spinning off the construction or hosting companies as separate companies.