360networks misses payment

360Networks disclosed that it will not make a $10.9 million interest payment due today on its 12.5% senior notes, putting the company in danger of a default. According to a statement by the company, it is skipping the payment to “preserve cash as it reviews its options.” The missed payment resulted in a further downgrade of the carrier’s debt by Moody’s Investors Service.

360networks has been in discussions with current shareholders and other parties to resolve a $300 million funding gap, but those talks have not led to any agreements, the company said. As a result, the carrier is now concentrating its efforts on other alternatives, “including restructuring.” Investment banking firm Lazard Freres has been retained as advisers in the process.

Previously, it had been reported that equipment vendor Alactel might provide the carrier with a cash infusion, but Alcatel has already written off a $700 million investment in 360networks that it made as part of a $1.1 billion contract to build an Asia-Pacific undersea cable. 360networks postponed that Asia-Pacific cable build in mid-May.

According to Mark Langner, senior analyst at Epoch Partners, 360networks has been the victim of a rapid change in customer buying habits. “Customers are switching from purchases of long-term IRUs (indefeasible right of use) to short-term leases of capacity, which means a reduction in the cash sales that fund the company’s operations,” Langner said.

Moody’s Investors Service downgraded 360networks’ debt rating again today, the second time in a little more than two weeks. The company’s senior unsecured debt grade was lowered to “Ca,” one of Moody’s lowest ratings, from “Caa3.” 360networks had $2.5 billion of debt and $278 million in cash at the end of the March quarter.

According to 360networks, it has another 30 days to make the interest payment on the 12.5% notes before it would be in default. If 360networks doesn’t raise the $300 million, “the company could be forced into default on one or more of its outstanding debt facilities, resulting in a likely bankruptcy situation,” said a recent report by Ehud A. Gelblum, analyst at Credit Suisse First Boston.