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Global Crossing Files for Chapter 11

Telecom: Debt of more than $12 billion drags down builder of massive fiber-optic network.

January 29, 2002|ELIZABETH DOUGLASS | TIMES STAFF WRITER

Global Crossing Ltd., which built the world's largest communications network under the ocean floor, sank into bankruptcy Monday under the weight of more than $12 billion in debt.

The Chapter 11 filing by the Beverly Hills-based company is the largest by a U.S. telecommunications firm, and a huge setback for founder and Chairman Gary Winnick, a feisty former bond trader who was crowned the richest man in Los Angeles in 1999 when his Global Crossing stake grew to be worth $6 billion.

Winnick's push to build a vast global network was not ill-conceived, just ill-timed, analysts say. The fiber-optics web may have ended up with extra capacity and overwhelming debt, but now it represents a near-steal for whoever buys it at a fraction of its cost.

That buyer may be an investment group led by Hong Kong billionaire Li Ka-shing that, as part of the bankruptcy filing, plans to pump $750 million into Global Crossing in an effort to keep it afloat. But that was little consolation for the company's creditors and shareholders, who stand to recover little, if any, of their investments.

"This is a complete debacle . . . everyone's worst nightmare," said Patrick Comack, an analyst at Guzman & Co. "It's awful for debt holders. It's awful for shareholders. It's a shame."

Winnick, who will stay on as chairman for now, declined to comment. Global Crossing Chief Executive John Legere called the bankruptcy filing--the fifth-largest in U.S. history--"a hard decision."

"The company at this level and size is just not able to handle the debt," said Legere, the company's sixth CEO in the last 4 1/2 years.

In its filing, Global Crossing said it had $12.4 billion in debt and assets of $22.4 billion. Its largest creditors are investors who purchased $6 billion in bonds and other debt securities and a group of 81 banks led by J.P. Morgan Chase and Citibank, owed about $2.25 billion, Legere said.

Other creditors are a who's who of telecommunications equipment makers, including Lucent Technologies Inc., Nortel Networks Corp., Cisco Systems Inc. and Alcatel, as well as large phone companies such as SBC Communications Inc. and Verizon Communications Inc.

Shareholders who held $55 billion worth of Global Crossing stock at its peak will get nothing.

The company's remaining 8,000 employees, including several hundred in Beverly Hills, will not be affected, Legere said. The thousands of recently laid-off workers, however, will not receive severance and other benefits initially promised them.

Comack and other analysts had hoped Global Crossing could limp through the downtrodden market for telecommunications services by selling off units and slashing costs.

Last year, Global Crossing cut more than 3,000 jobs, closed dozens of offices, sharply reduced spending and moved to pay preferred dividends in stock instead of cash to save money. But in the end, it wasn't enough.

Legere said the company's bankruptcy filing is just part of a plan aimed at rescuing Global Crossing. The central component is a tentative agreement with Asian powerhouses Hutchison Whampoa Ltd.--controlled by Li--and Singapore Technologies Telemedia, which have agreed to pay $750 million for a majority stake of undefined size in Global Crossing.

If negotiations go well, Legere said, Global Crossing could emerge from Bankruptcy Court before the end of the year. Under the worst-case scenario, Global Crossing's assets could be liquidated and its network shut down, leaving customers to line up space on competing networks.

Both of the prospective Asian saviors already have close ties to Global Crossing and its affiliated companies through overseas ventures. Hutchison owns half of Hutchison Global Crossing, a communications provider in Hong Kong, while Singapore Technologies owns half of StarHub Crossing, a carrier in Singapore.

Analysts say both companies probably see the investment as a way to secure relatively cheap access to worldwide communications networks, which they need to serve their international corporate customers. With the investment, the companies also would pick up Global Crossing's 59% stake in Asia Global Crossing, a separate company that runs a valuable communications network in Asia.

Some believe the core assets at Global Crossing--a nearly complete network that covers more than 100,000 miles and connects 200 major cities in 27 countries--could draw other bidders in Bankruptcy Court.

The current deal with the Asian firms is not exclusive and still must win the approval of various stakeholders and the Bankruptcy Court. Other companies, such as Deutsche Telekom, WorldCom, SBC Communications or Verizon Communications, may weigh in with offers, according to analysts.

"It's not an unreasonable expectation," said Tom Soja, who heads Boston-based telecommunications analysis firm T. Soja & Associates. "Anyone with cash, you can't rule out as a bidder, particularly if they have customers who need that worldwide connectivity."

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