Broadband provider XO Communications, Inc., has filed for Chapter 11 bankruptcy protection, ending months of speculation and sometimes contentious dealings with billionaire investor Carl Icahn, who, along with two other investors, holds $1 billion in XO debt. The filing is limited to the parent corporation, XO Communications, Inc., and no operating subsidiaries of XO are part of the filing. XO does not expect any reductions in workforce or facility closings as a result of the filing and will continue to pay employees and provide employee benefits during the reorganization.
XO currently estimates that the approximately $555 million of cash and marketable securities on hand as of April 30 will be sufficient to fund its operations while the bankruptcy case is pending.
Concurrent with the Chapter 11 filing, XO submitted a two-pronged plan of reorganization that includes two alternative restructuring scenarios. The first alternative involves the Reston, Va.-based XO’s long standing proposal with Forstmann Little & Co. and Telefonos de Mexico S.A. de C.V.
Under that scenario, Forstmann Little and TelMex will each own 39 percent of the company’s outstanding equity. The remaining equity, other than that allocated to the company’s employees, is expected to be held primarily by holders of the company’s senior notes. Consequently, current holders of the company’s equity securities are expected to lose substantially all of the value of their investment as a result of the restructuring.
XO has had trouble selling that deal, however, to stockholders. Even Forstmann Little and TelMex have expressed concerns about XO meeting certain conditions of the deal and have asked XO to consider terminating the agreement. XO has said it has no plans to terminate the deal and XO does not believe that Forstmann and Telmex are entitled to terminate the agreement unilaterally.
Because of the uncertainty of the Forstmann Little/TelMex deal, XO’s plan of reorganization includes a standalone version that calls for the conversion of the $1 billion in loans under the secured credit facility into common equity and $500 million of pay-in-kind junior secured debt.
The informal steering committee of lenders under the secured credit facility has indicated that it is prepared to support, and recommend that the lenders under the secured credit facility approve, the stand-alone restructuring.
Since the company’s senior unsecured creditors are not receiving full value for their claims under either of the restructuring alternatives, the proposed plan of reorganization does not provide for any recovery by the holders of convertible subordinated notes or existing XO equity and equity related securities, including XO common and preferred stock, and outstanding stock options. The standalone plan, however, contemplates that rights to purchase common stock of reorganized XO will be granted to holders of senior unsecured notes and, to the extent these rights are not exercised fully, to holders of subordinated notes and outstanding preferred and common stock.
