Global Crossing: Choosing a Path

Creditors Trying to Recoup Big Losses

By MICHAEL STREMFEL
Staff Reporter

Global Crossing Ltd.'s major creditors have hit a long-dreaded crossroads.

After last week's announcement of plans to sell a controlling equity stake to two affiliated Asian companies for $750 million & #150; made in conjunction with a Chapter 11 bankruptcy filing & #150; the creditors now know that virtually all the $7.8 billion owed to them will never be repaid.

Their recourse? Either cast their lot with proposed acquirer and Hong Kong billionaire Li Ka-Shing in the hopes of salvaging more than the current market value of 13 cents on the dollar. Or push to have Global Crossing's assets liquidated, split the meager cash proceeds and be done with it.

It's a stunning, though not entirely unexpected, turn of events for a company that just three years ago was being toasted both on Wall Street and within the telecom community. As envisioned by founder Gary Winnick, Global Crossing's worldwide network of fiber-optic cable would feed into the growing demand for high-speed communications. But that demand remains limited and Global Crossing's debt loads have been staggering. In recent months, as bonds were trading at well under their face value and the stock plummeted to well under a dollar, Wall Street has been bracing for a financial denouement.

But there's much that remains up in the air. Still unclear is the status of Winnick, the aggressive former Drexel Burnham bond trader whose holdings in Global Crossing at one time made him the richest person in Los Angeles. The Wall Street Journal last week quoted Global Crossing Chief Executive John Legere as saying that neither he nor Winnick likely would have any role in the reorganized company. However, Winnick spokesman Mike Sitrick said that Winnick remains chairman and Legere remains chief executive and that the quote attributed to Legere is incorrect.

Creditor committees formed

As of late last week, creditor committees were still in the process of being formed. However, interviews with several parties involved indicate that the major creditors are focused on casting their lot with Li's Hutchison Whampoa Ltd. and Singapore Technologies Group, while hoping that one or more competing bids emerge.

Among the first big issue to be negotiated: how much equity will the Asian buyout group get for their $750 million investment?

& quot;The percentage will not be known until we go through some of the details of the restructuring process, & quot; said Anthony Christie, a senior vice president at Global Crossing. & quot;But the bid was made by both potential investors with the intent of gaining majority control. & quot;

The size of the equity stake will be disclosed this week.

Creditors will negotiate to keep the Asians' stake to a minimum, thereby maximizing the size and value of their own position in the reorganized company. (In the proposed restructuring, which must be approved by a bankruptcy judge, creditors' debt would be converted to equity, new debt and cash, Global Crossing officials said.)

If the Asians were to receive only a 51 percent stake for their $750 million, that would put Global Crossing's total equity value at $1.47 billion, of which $720 million would be left for creditors to divvy up.

If, however, the Asians were to get a 75 percent stake, that would put the company's total value at $1 billion, leaving only $250 million for the creditors to split.

& quot;The pie is going to get sliced among three primary groups of creditors, so the first task will be to get the pie as big as we can, & quot; said one source close to the deal.

Creditor jockeying

Since all the creditors are interested in maximizing their stake, they will be allied during the initial phase of talks. After that, they likely will jockey among themselves for slices not taken by the Asians.

Of Global Crossing's three major creditor groups, the bank group (with $2.25 billion in senior secured debt) likely will end up with the biggest equity, followed by the two bondholder groups (which together hold about $4.6 billion in unsecured debt). Preferred and common shareholders are to be wiped out under any reorganization plan, according to several sources close to the process.

Negotiations are expected to be intense over whether the equity value of a reorganized Global Crossing will be $1 billion or closer to $1.5 billion. Less than two years ago, the company's value was $47.5 billion.

& quot;The (Asian group's) bid values the company's assets at about 10 cents on the dollar, net book value, which is a fire sale & #150; especially given the quality of the assets, & quot; said Eric Tutterow, an analyst at KDP Investment Advisors in Chicago.

Of the assets, Global Crossing's crown jewel is its 100,000-mile-long fiber-optic network connecting five continents, 27 countries and more than 200 major cities & #150; the world's largest telecom system. The network is 85 percent complete, with the final East Asian leg slated to be done by the end of next month.

Media reports last week indicated that likely competing bidders include Deutsch Telekom AG, Verizon Communications Inc. and SBC Communications Inc.

Officials from those companies refused comment or did not return phone calls. But Tutterow said bids from such industry giants are far from assured.

& quot;The companies that would like to add capacity can't afford to at this stage, and the ones who can afford to buy (Global Crossing's network) probably don't need it, & quot; he said.

The overcapacity of telecom infrastructure means that any bidder for Global Crossing or its assets would need to wait several years for the projected ramp-up in broadband demand.

Another possible bidder would be a private equity fund, which would have a more speculative investment orientation than an existing telecom giant would have.

Of those, the most active lately has been New York-based Forstmann Little & Co.

Just last week, Forstmann agreed to invest another $175 million into troubled telecom carrier MacLeodUSA Inc., helping it stave off bankruptcy. That deal increases Forstmann's equity in MacLeodUSA to 57 percent. Simultaneously, Forstmann is negotiating a restructuring of XO Communications Inc., after joining with Telefonos de Mexico SA two months ago to invest $800 million in that troubled telecom company.

Forstmann Little officials did not return phone calls.

But a source close to that firm said it is unlikely to bid on Global Crossing because it already has $2.5 billion invested in McLeodUSA and XO. & quot;They're focused on protecting those other telecom investments right now, & quot; the source said.

Meanwhile, the Asian group's buyout offer is expected to be filed with the U.S. Bankruptcy Court in New York this week, after which & quot;things will unfold pretty quickly, & quot; said a source close to the process.

Salvaging ties

One factor making the proposed deal attractive to Hutchison Whampoa and Singapore Technologies is that they already are tied to Global Crossing. Thus, any turnaround would help them salvage those pre-existing relationships.

Asia Global Crossing, which is 59 percent owned by Global Crossing, has a 50-50 joint venture with Hutchison Whampoa. Asia Global Crossing also has a 50-50 joint venture with Singapore Technologies.

The Blackstone Group has been retained by Global Crossing to handle inquiries from potential bidders. Blackstone officials did not return calls last week.

As for the major creditors, two executives out of JP MorganChase's New York headquarters are representing the secured bank debtholders, said a JP MorganChase spokesman. JP MorganChase is the lead syndicator on billions of dollars in secured bank debt, but its direct exposure is reportedly only about $100 million.

Meanwhile, Global Crossing's primary bondholder group is being represented by Chanin Capital Partners of West Los Angeles. Chanin officials declined comment.

Global Crossing has until May 28 to file its reorganization plan with the U.S. Bankruptcy Court. While it could get an extension, that would seem unlikely given that Global Crossing has publicly stated it plans to have its restructuring complete by August.

When asked if that timeline is reasonable, a source close to the deal responded, & quot;It depends & #150; if people are reasonable. & quot;

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