Covad, Bondholders Negotiate Restructuring


Covad Communications Group Inc. — one of the few independent digital subscriber line providers still standing — said it plans to file for bankruptcy protection later this month. The company is presently negotiating with bondholders to unload its $1.4 billion in debt.

The debt restructuring, announced last Tuesday, is designed to give Covad an opportunity to raise enough cash to continue operations. Debtholders would exchange their bonds for a mix of cash and preferred stock.

Covad said the cash portion of the offer consists of 19 cents on the dollar for the face amount of the accreted value of both high-yield and convertible bonds. The company expects to return all of its $26.5 million in restructured cash reserves to holders of its 12.5 percent bonds.

The preferred equity would have a $100 million liquidation preference and be convertible into roughly 33 million common shares, or 15 percent of Covad's existing, fully diluted outstanding common stock.

After the payout, Covad will have $250 million in cash, enough to fund its operations through the beginning of next year.

The announcement lifted Covad's stock. It closed last Tuesday up 6 cents, to 56 cents per share.

Covad stock has lost more than 90 percent of its value over the past year amid an industry contraction that's hit several independent DSL providers.

If the restructuring plan is approved by bondholders and completed by January 2002, Covad said it expects to dole out an aggregate $283.3 million to bondholders. At that time, the company will need about $200 million in cash to reach profitability by the third quarter of 2003, it said.

Covad said a "majority" of bondholders have agreed to the proposed restructuring.

The company's business operations, DSL network and customer-service operations will continue unaffected during the process, the company said.

The largest DSL provider outside of the Baby Bells, Covad had about 330,000 customers as of June 30. It has employed a "safety net" to sign on high-speed data customers left in the lurch by DSL providers such as NorthPoint Communications Corp., which sold off its hard assets to AT&T Corp for cents on the dollar. and MegaPath Networks — which rely on Covad for their high-speed connections — publicly supported the company's move.

"Covad will be in a much stronger financial position going forward, with no debt and a much smaller cash requirement, if this transaction is successful," CEO Charles E. Hoffman said in a press release.

Covad is one of a dwindling number of DSL providers that have managed to hang on in a turbulent market in which independent data firms have found it difficult to raise more cash to fuel ongoing operations.

Many, such as Jato Communications, have already closed shop, while others, including Teligent Inc., 360Networks Inc. and Winstar Communications Inc., have also sought bankruptcy protection.

Just two weeks ago, Rhythms NetConnections Inc. and Internet Commerce & Communications (formerly filed for bankruptcy. Their stocks are presently virtually worthless.

By market close last Tuesday, Rhythms shares were down to 2 cents apiece. Earlier this month, the NASDAQ halted trading of IC&C stock at 8 cents per share.