Covad, McLeodUSA Beat Bankruptcy

Covad Communications Group Inc., a DSL provider based in Santa Clara, Calif., and McLeodUSA Inc., a regional competitive local exchange carrier based in Cedar Rapids, Iowa, are notable survivors that have eradicated billions of dollars in debt.

ICG Communications Inc. is another high-profile competitor that expected to emerge from bankruptcy by this month. The company, based in Englewood, Colo., filed for Chapter 11 bankruptcy protection in November 2000.

Several other telecommunications companies including Mpower Communications Inc., Williams Communications Group Inc. and Digital Teleport Inc. say they have reached agreements with their creditors to reorganize and facilitate a speedy resolution through Chapter 11 filings. Digital Teleport, a regional carrier's carrier based in St. Louis, Mo., announced in late April it remained on track to emerge from bankruptcy before the end of the year.

Of course, these newsbytes hardly are reason to pop a bottle of champagne.

Many notable bankrupt telecom providers have been tangled in creditor negotiations for at least a year while several others have closed their doors and sold their assets for pennies on the dollar. Think PSINet. Plus, nobody knows for sure if the new Covad, McLeod and ICG are going to prosper.

How many of ICG's wholesale customers will be goners by the end of the year? Can Covad's direct salespeople convince small to medium-sized businesses to trust the company? Could McLeod run out of money? "They still have to prove themselves in the market," Yankee Group analyst Nick Maynard says.

He adds that competitive local exchange carriers seeking a profit must streamline operations, decrease installation times, improve customer service and bundle high-quality products while reducing customer churn.

That's a tall order for any competitor particularly if a bankruptcy court is micro-managing a company's daily operations.

Dubbed a poster child for the Chapter 11 bankruptcy process, Covad last year retained its independence because only its parent company filed. Covad subsequently eliminated $1.4 billion in high-yield and convertible bondholder debt in exchange for cash and a 15 percent equity stake. A key to the company's success during the bankruptcy process was "letting [customers] know exactly what was going on," says Abhi Ingle, Covad's vice president of marketing. "You want to make sure your customers don't desert you."

Last year the company narrowed the gap between a loss and profitability -- doubling its revenue and slashing its annual loss on operations to $536.9 million, compared to a $1.4 billion loss in 2000.

Covad also lowered its burn rate to less than $45 million during this year's first quarter. Still, the company doesn't expect a profit until the second half of 2003.

And the DSL provider has yet to prove it can capture substantial revenue in the small to medium-size business market through a direct sales channel. Covad to date has sold its DSL lines primarily to ISPs. Last year the wholesale channel represented 96 percent of its 351,000 subscriber lines. But the provider has decided to use a hybrid strategy of wholesale and direct sales; direct sales comprised seven percent of revenue by the end of the first quarter.

Analysts at New Para digm Resources Group Inc. say competitive carriers marketing to businesses still have a great advantage due in large part to anti-RBOC sentiment. Businesses are willing to leave a Bell for a 10 percent to 20 percent discount and more personalized service, they say.

Other telecom research firms agree, arguing that far too many critics unfairly have ruled out the competitor telecom sector as an extinct market.

"CLECs are decreasing in total numbers as any pundit will tell you but their power is growing by leaps and bounds," writes Robert Saunders, research director of Eastern Management Group in an April report. "Despite the bankruptcies and burnouts that we read about, the fact is that competitive service providers continue to grow their share of the business and residential markets."

Competitive carriers emerging from bankruptcy have another thing going for them. For instance, McLeodUSA has "one big monkey off their back" -- a lot less debt, says Greg Mycio, director of research and analysis at New Paradigm Resources Group.

McLeodUSA buckled last year under a heavy debt load as it tried to be everything to everybody, including a national wholesale carrier. During the last several months, though, McLeodUSA has shed several non-core businesses, including its wholesale ISP, directory publishing and customer premises equipment units.

Through its reorganization, McLeodUSA abolished $3 billion in bond debt and raised $175 million through majority investor Forstmann Little. However, the company said in its 10-K filing with the Securities and Exchange Commission it expected to use all the proceeds to pay its bondholders and emerge from bankruptcy. In fact, McLeodUSA anticipated having to use $25 million in its coffers to emerge. However, the company did arrange for $110 million in exit financing.

The competitive carrier said it has returned to its original business model, concentrating in its 25-state region encompassing the midwest, southwest, northwest and Rocky Mountain states. McLeod spokesman Bruce Tiemann did not return phone calls seeking comment on the company's focus.

Bacco, of TeleChoice, says McLeodUSA is in the process of coming out with a DSL and data strategy -- one that has yet to be executed. McLeodUSA initially provided private line services but the company did not move beyond the service quickly enough as the prices shot down, she says.

McLeodUSA says it may be difficult in the future to obtain capital to fund its business and factors, including regulatory decisions and the Bells' entrance into the long-distance market within their local regions, could eat into revenue. 

"CLECs are decreasing in total numbers as any pundit will tell you but their power is growing by leaps and bounds, Despite the bankruptcies and burnouts that we read about, the fact is that competitive service providers continue to grow their share of the business and residential markets."

-- Robert Saunders, research director of Eastern Management Group in an April report.

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