- The Washington Times - Tuesday, June 18, 2002

XO Communications Inc. filed for bankruptcy yesterday, finally falling victim to waning interest from investors that made it difficult for the company to repay its massive debts.

XO, a Reston telephone and Internet company, filed for Chapter 11 protection from creditors in U.S. Bankruptcy Court for the Southern District of New York, listing $8.7 billion in assets and $8.5 billion in liabilities.

"Simply stated, the company has too much debt, given the current and projected level of business operations," XO Chairman and Chief Executive Dan Akerson said in a statement.

XO got its start in 1994 with a plan to compete against the large telecommunications companies after a 1996 law deregulated the industry. The company has 6,000 employees worldwide about 400 locally and a fiber-optic network in 65 cities, where it markets telephone and Internet service.

But it also has enormous debt, which has forced XO to slow its growth. The company said in November that it would stop making debt payments. The cash crunch has nearly wiped out the value of XO's stock. Its shares reached a high of $66.25 on the Nasdaq Stock Market in March 2000. Yesterday, it closed at 3 cents a share in over-the-counter trading.

XO owes bondholders $3.8 billion. It owes banks $1 billion.

The bankruptcy filing was expected for months because the company said last year it would file a reorganization plan once it found an investor to help it overcome its debt.

"They really didn't have much choice. They either wipe out a lot of debt or they aren't financially viable. They also need to get new capital," said Ken Kotylo, telecommunications analyst at investment banker William Blair & Co.

But its bankruptcy filing wasn't expected to include two reorganization plans. One proposal assumes the company will receive $800 million from Forstmann Little & Co., a New York buyout firm, and Mexican phone company Telefonos de Mexico S.A.

Forstmann Little and Telefonos de Mexico said Nov. 29 they would invest $800 million in XO in return for 78 percent of the firm. But on June 6, Forstmann Little and Telefonos de Mexico asked XO to let them out of the agreement because the Reston company has lost too much value since last year.

XO officials have said they won't terminate the deal.

George Sard, a spokesman for Forstmann Little & Co., declined to comment on XO's bankruptcy filing.

Bondholders, including billionaire financier Carl Icahn, have rejected the Forstmann Little deal because they would get $200 million in cash and a 20 percent equity stake in the new company in return for the $3.8 billion that XO owes them.

A source close to negotiations said it is unlikely that Forstmann Little and Telefonos de Mexico will make the investment because XO won't have its reorganization plan approved by Sept. 15, one of the many conditions the Reston firm must meet in order to get the funding. That deadline is too close, especially in light of the objection of bondholders to the deal.

"Unless XO can get a nonconsensual bankruptcy through bankruptcy court in record time, then the Forstmann Little deal will be moot," the source said.

A second reorganization plan outlined in XO's bankruptcy filing assumes XO won't be able to reach an agreement with Forstmann Little and Telefonos de Mexico, and will have to find money elsewhere. Under the alternate plan, XO would convert half of the $1 billion it owes to banks into shares of common stock. Half of the debt would be repaid, but without interest.


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