360networks balks at interest payment

Company executives said 360networks simply would not make the interest payment on its 12.5 percent senior notes to "preserve cash" as it reviews its options. The company also announced it retained Lazard Freres, an investment banking firm, to help it "review its options," which could include restructuring the debt or selling some assets to make the interest payment.

The company has 30 days to make the interest payment or it will default on the loan, likely meaning it will have to file for bankruptcy protection, analysts said.

"It's not much of a surprise," said Bill Klein, an analyst at Dresdner Kleinwort Wasserstein. "They now have to negotiate with the bondholders to either make the payment or file for bankruptcy. Bondholders are funny like that. They want to get their money."

360networks Chief Executive Greg Maffei, who left behind his high-profile CFO post and more than $64 million worth of stock options at Microsoft in late 1999, is wrestling with financing issues that he may not have anticipated when he jumped ship.

The company, along with competitors Global Crossing and Level 3 Communications, has spent billions in the past three years to build out its extensive fiber-optic telecommunications networks, often taking out large convertible bond loans to finance the expansion.

According to market research company Meta Group, more than $650 billion in convertible bond notes were issued to telecommunications companies in 2000. In the first quarter alone, more than $14 billion of these notes defaulted, analyst Jonathan Poe said.

360networks executives were not immediately available to comment on the missed interest payment, but the company has sent out numerous signals in recent months that its financial viability is in question.

In mid-May, it posted a first-quarter loss of $106 million, or 14 cents a share, and announced it would cut its planned capital expenditures for the year by more than $1 billion to service its enormous debt.

At the time, the company said it was in discussions with its shareholders to scrounge up another $300 million in working capital, most likely through the issuance of more senior notes.

The $2.5 billion in long-term debt, combined with mounting quarterly losses, compelled Moody's Investors Service, a corporate debt rating service, to cut the company's debt rating last week to a "Caa3" rating from a "B3" rating, basically the firm's lowest level.

"Absent additional funding, the company's liquidity position may be insufficient to provide sustained support for its operations," wrote senior analyst John Page in the downgrade notice.

Six of the seven analysts tracking 360network's stock rate it either a "hold" or a "sell."