Fighting to survive

Filing for Chapter 11 bankruptcy protection gives a company breathing room to reorganize, negotiate with creditors, attempt to secure financing, and perhaps sell some assets. But few companies emerge from the grim process alive.

360networks thinks it has a chance. The company's senior secured lenders have agreed to subordinate their liens to up to $100 million of debtor-in-possession financing, for which 360networks says it has firm proposals. The company also is pursuing other strategic alternatives to raise money, including asset sales.

What 360networks doesn't want to do is liquidate the company. A 360networks spokeswoman said the current “unsettled” telecommunications market is not a favorable environment for liquidation, and executives hope reorganization will generate more value.

But first, 360networks must get the numbers to work. According to the bankruptcy filing, the company has $155 million in cash and short-term investments, down from $364 million at the end of 2000.

But creditors are owed about $3.6 billion, including $1.45 billion in unsecured, publicly held debt. Remove property plant and equipment, network assets under construction and goodwill, and the asset line equals about $1.7 billion.

Indeed, most of 360networks' assets — $3 billion worth — consist of networks under construction. But that line item is hard to evaluate without knowing how much it will take to turn those assets into a revenue-producing network, said John Page, senior analyst at Moody's Investors Service.

“360 was one of the most ambitious networks in terms of size,” Page said.

One alternative to liquidation would be for 360networks to sell one or both of its subsea cable systems.

The most likely candidates to purchase 360americas or 360atlantic are carriers already operating in the undersea space or international service providers — such as Telefonica, Telecom Italia, Cable & Wireless and Singtel — investing in undersea systems, according to Michael Ruddy, managing director of Terabit Consulting.

Despite tough competition in the Atlantic, 360atlantic is attractive because it's already built and offers a geographic ring, which provides fully protected capabilities, Ruddy said.

A strong prospective buyer for the 360atlantic system is Global Crossing, Ruddy said. Global Crossing's current Atlantic system — Atlantic-Crossing 2, or Yellow — is only two fiber pairs on a point-to-point system shared with Level 3 Communications. AC-1, Global Crossing's older system, is used as a restoration path, or backup, to AC-2.

“But once traffic on AC-1 exceeds 140 Gb/s, then Global Crossing will need a new restoration path,” Ruddy said.

FLAG Telecom is building its own next-generation Atlantic network but is a solid roll-up candidate for 360americas because it lacks connectivity to South America, Ruddy said.

But 360americas has separate financing and was not included in the bankruptcy filings, according to the 360networks' spokeswoman.

“As for 360atlantic, we have not made any decisions,” she said.

Whether 360networks or its creditors would get full value for the subsea systems is questionable.

360networks spent $770 million to build 360atlantic and acquired 360americas as part of the $1 billion GlobeNet Communications purchase in June 2000.

But undersea cable is not attracting a premium, and 360networks might recoup only a fraction of its construction costs, Ruddy said.

“It's a bad time,” he said. “There is a perception that there's overcapacity in the marketplace.”

If 360networks liquidates, one scenario would have its network capacity being dumped onto the market by a new, low-cost competitor, driving bandwidth prices even lower.

That usually doesn't happen in the subsea market, said Frank Governali, analyst at Goldman Sachs. That's because buyers of undersea capacity see it as a long-term, strategic piece of the network, so they are “not about to buy — even at fire-sale prices — capacity if they feel at all uncertain about the capabilities of the operator,” Governali said.

With this in mind, Governali doesn't foresee any new subsea entrants because they will lack customer credibility and will need huge amounts of capital.

“Such a group would have to act quickly and would face significant obstacles in getting financing because of the market's pessimism toward fiber,” Ruddy said.

Off balance

360networks' bankruptcy profile

Cash on hand $155 million

Assets $1.7 billion

(minus property and equipment, assets under construction, and goodwill)

Liabilities $3.6 billion

Secured creditors
Chase Manhattan Bank, Credit Suisse First Boston, Goldman Sachs Credit Partners, Toronto Dominion, Export Development

Sample of unsecured creditors
Pirelli Cables, Emerson Telecom Systems, FiberNet Telecom Group, Cisco Systems Canada, Fiberwave, ADC Telecommunications

Source: 360networks