- The Washington Times - Monday, July 9, 2001

Three baseball caps rest on ashelf above the desk where Net2000 Communications Inc.Chief Executive Charlie Thomassits.
The Boston Red Sox, New YorkYankees and Baltimore Orioles hats represent three of the nine cities where the Herndon-based competitive local exchange carrier markets voice and data services, indirect competition with regional Bell operating companies.
But it is unlikely Mr. Thomas,who founded the company in 1993,will add a new cap to his collectionthis year.
Staggering debt and limited access to capital have forced Net2000 and competitive local ex-change carriers or CLECs across the country to slow their rampant spending on nationwide telecommunications networks andfocus instead on earning money.
The Telecommunications Act of1996 was supposed to help new phone companies get off the ground by spurring competition.But CLECs have had only modest success chipping away at the monopolies of the Baby Bells Verizon Communications Inc., BellSouthCorp., SBC Communications Inc.and Qwest Communications Inter-national Inc.
"A lot of these companies were told by Wall Street that the first priority was to build out the network and not to worry about revenue because the survivors would be the ones with huge networks," says John Windhausen Jr., president of the Association for Local Telecom-munications Services, a D.C.-based group representing CLECs.
But by the time Wall Street changed direction, the CLECs accumulated debilitating levels of debt that could radically change the industry by forcing some of the 35 publicly traded competitive local exchange carriers into insolvency.
Five Northern Virginia CLECs have a combined $11.2 billion in long-term debt. There are no publicly traded CLECs in Maryland or the District.
"The debt loads have to come off of the CLECs. Almost every one has a debt load that isn't sustainable,"says George F. Schmitt, chairmanand acting chief executive at E.s-pire Communications Inc., a CLEC in Herndon.

Easy money

Three of Northern Virginia's five CLECs have filed for Chapter 11 bankruptcy protection from creditors this year and are re-structuring their enormous debt, and it is uncertain whether they will emerge from bankruptcy.
E.spire in March became the first publicly trade CLEC in the area to file for bankruptcy. The eight-year-old company has $980 million in debt, and it faced debt payments of $120 million a year if it didn't go into bankruptcy to re-structure its accounts, Mr. Schmitt says.
Vienna-based Teligent Inc. and WinStar Communications Inc.,which is based in New York but has 900 of its 2,000 workers employed at its Northern Virginia network operations center, also filed forbankruptcy this year.
Teligent, which ceased to be a publicly traded company when it was delisted in May, has $1.44 billion in debt. WinStar has $3.6 billion in long-term debt.
Among the region's publicly traded CLECs, only Net2000 and XO Communications Inc., in Reston, have avoided bankruptcy so far. But Net2000 is carrying $98 million in long-term debt, and XO Communications has $5.2 billion in debt.
Congress in 1996 agreed to allow the Baby Bells to compete for long-distance service as long as they opened the local-calling market to competition.
Several smaller companies, CLECs, responded and began selling telephone and Internet services.
The new CLECs had no problem attracting money because investors saw demand for high-speed Internet and calling services. Everyone expected the companies to spend a lot of money to build their telecommunications networks, then reap huge profits later as they offered an alternative to the Baby Bells.
"It became a land rush. Wall Street said 'We understand you need the money, and we will be here for you,' " says Terry Barnich, president of New Paradigm Resources Group, a Chicago research firm that follows the CLEC industry.
XO raised $200 million in its 1997 initial public offering. It raised $3.4 billion in equity and debt funding in 1998 and 1999. It sold preferred stock last year to raise another $1.2 billion.
Teligent raised $1.7 billion from private investors.
Net2000 raised $190.5 million inequity funding, scooped up another $212 million in its March 2000 initial public offering, and then raised $200 million in debt funding in June 2000.
While the funding rolled in, customers did not. Demand didn't develop for CLEC services like investors expected. A FederalCommunications Commission report from December indicates the CLECs have a mere 8 percent share of the market for local-calling services, or about 16.4 million customers. As more CLECs enter the market for local-calling services, analysts expect rates to fall like they did after deregulation of long-distance calling.
As it turns out, the expectations of the industry and investors were too ambitious.
"I think we were spoiled by the market enthusiasm and the increase in the Nasdaq. It created an expectation that we should have a 40 percent market share in five years," says Mr. Thomas, whose company has 3,000 voice and data customers.
Investors began to abandon CLECs early this year, even though they were still searching for money to complete construction of their expensive networks and to pay the interest payments on their massive debt.
The CLECs have spent $56 billion on equipment since passage of the Telecommunications Act of 1996, Mr. Windhausen says.
But Brookings Institution senior fellow Robert Crandall argues in a new report released June 27 that some CLECs including Teligent got in trouble by expanding their networks too fast and relying too heavily on debt financing to fund construction of networks.
WinStar Chief Executive William Rouhana says everyone understood from the beginning that CLECs would have to carry a lot of debt. Still, investment slowed to a trickle when investors saw just how much debt the companies had and realized how long it would be before they could make money, he says.
"It was schizophrenia. WallStreet lost patience, but these were never short-term business plans. It presumed a large amount of capital was needed over a long period oftime," Mr. Rouhana says.

Now what?

Some CLECs raised money this year, but the terms haven't always been favorable. XO received $250 million in equity funding in April,but it also had to resort to selling high-yield bonds this year when it raised another $517 million.
XO continues to add subscribers and expects to report second-quarter revenue of up to $310 million, compared to $140.6 million a year ago. Despite its massive debt, XO is optimistic.
"Operationally, XO is probably stronger now than it ever has been,"XO Vice President Noelle Beamssays.
Others are cautious.
"People have completely soured on the CLEC sector. I would not want to be out there trying to raise money right now," says Mr.Thomas, who also plans to add about 1,000 new customers this year.
The enormous debt burden and limited access to capital has changed the plans the companies had.
XO said in April it will cut spending by $2 billion over the next five years. It canceled plans to introduce service in Europe.
The $1.9 billion in cash on hand and the access to debt funding it has already negotiated means the company will have money into the second quarter of 2003.
Net2000 laid off 10 percent of its work force in March and trimmed its budget for capital expenditures from $140 million to $100 million. Its funding will last into the thirdquarter of 2003.
"We have stopped going into new markets," Mr. Thomas says.
Even if E.spire emerges from bankruptcy, it will not enter new markets, Mr. Schmitt says.
WinStar is marketing services and trying to sign up new customers in just 20 of the 60 cities where it does business.
Despite curbing spending, many expect just a handful of the 35 publicly traded U.S. competitive local exchange carriers to survive be-cause there isn't enough money for investors available any longer and there aren't enough customers to support them all.
"We are going to see consolidation," Mr. Barnich says.
And some will fail. NorthPoint Communications Inc., an Emeryville, Calif., CLEC that sold high-speed Internet connections, ended service to 100,000 customers in April.
Few expect Teligent to overcome its debt.
WinStar and E.spire hope to emerge from bankruptcy with millions of dollars in debt wiped away.That leaves some wondering whether all the CLECs will file forbankruptcy so they can have their debt erased and compete with their restructured competitors.
"It will be very difficult to compete with us if you have billions of dollars in debt and we don't," Mr.Rouhana says.
XO disputes the logic of filing for bankruptcy simply to wipe away debt.
"Our objective is to avoid bankruptcy at all costs. We do not think bankruptcy would give us a competitive advantage," Miss Beams says.
But even the CLECs that have avoided bankruptcy and continue to make money have suffered from the industrywide bloodshed. As a group, the stock prices of publicly traded CLECs were down 54 percent after the first six months of the year.
The work force also has been affected by the downturn.
At least 130,442 jobs in the telecommunications industry were eliminated in the first half of this year, according to a new report from Chicago outplacement firm Challenger, Gray & Christmas. That is 19 times more job cuts than occurred during the same period last year at U.S. telecom companies.
And the carnage isn't over yet. Analysts predict the sector won't rebound for 12 to 18 months.
Even if the CLECs bounce back, Mr. Rouhana says, the will have to figure out how to grow less quickly than they planned in 1996 when the telecommunications act passed and seemingly unlimited amounts of money were thrown at them by investors.
"I think it will be a long time before any capital is available again," he says.

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