Rhythms files for Chapter 11

Competitive DSL provider Rhythms NetConnections has filed for protection under Chapter 11 of the U.S. Bankruptcy Code and plans to terminate customers’ service in mid-September unless it can arrange new financing next week.

The move comes as no surprise to those who follow the company, as Rhythms’ financing has been a question for several months. Inn June, the company discontinued service in nine markets.

The company currently has about $133 million in unrestricted cash and cash equivalents. Rhythms is not seeking debtor-in-possession financing, and intends to use unrestricted cash on hand to fund operations during the post-filing period. Neither the amount of debt nor the debtors could be determined as of posting.

Holders of more than 60% of the principal amount of Rhythms’ notes, however, have entered into an agreement for reorganization or, if that cannot be accomplished, liquidation of the company. Under the voting agreement, which requires approval from holders of two-thirds of the principal amount of Rhythms’ notes, the company will give customers a 31-day service termination notice by or on Aug. 10 if no acceptable “going concern” bid has been placed. The company is currently providing service to all of its customers.

The failure of Rhythms, and the cause of that failure, echoes the troubles experienced by NorthPoint Communications, another competitive wholesale DSL provider, which declared bankruptcy late last year.

“[Rhythms] and NorthPoint ramped up fast, attacked COs across a very large expanse, and they just became overextended,” said Greg Mycio, director of broadband analysis at New Paradigm Resources Group.

The failure also raises questions about the fate of the last of the competitive nationwide DSL players, Covad Communications. With just one exception, that company’s stock price has close below $1 every day since June 11.

Mycio said Covad is in better shape then either Rhythms or NorthPoint was.

“They’ve rolled out a lot of lines, and it seems the worst of their receivables problems are in order,” he said. Still, “their fate is going to be determined whether the business model works out.”