FairPoint at a crossroads

There are definite winners and losers in company’s bankruptcy filingQuestions are already being raised about FairPoint Communications’ bankruptcy plan, which would pay off the lenders, the executives, top consultants – and, of course, bankruptcy attorneys – but would leave stockholders, bondholders and unsecured creditors with little or nothing and the unionized workers in a very tenuous position.

On Oct. 30, four days after FairPoint filed for Chapter 11 reorganization, the Ad Hoc Committee of FairPoint Noteholders was the first to directly criticize the deal in a bankruptcy court filing. It likely won’t be the last.

The bankruptcy deal is aimed at keeping dial tones running and modems blinking, as well as give the company enough capital to expand broadband in the state. These are the chief concerns of state regulators and FairPoint, chief executive David Hauser said in an interview with NHBR.

The bankruptcy plan submitted by FairPoint also would reduce interest payments from $200 million to $65 million a year and give the company $75 million extra in revolving capital, which would enable the company to emerge stronger then ever, Hauser said.

“This was a difficult decision for us to make, but I think we made the right decision for the company, the customers and the region we serve to keep providing customer service, and to deploy the capital for broadband, because broadband is our future,” he told NHBR.

But the deal left bondholders out in the cold. They would not get a penny of the money in return for the nearly $600 million they invested in FairPoint. Instead, they would have to wait in line with all the other unsecured creditors and proportionally split up 2 percent of the new company’s equity.

At this point, nobody knows how much that will be.

Under the proposed deal, top executives will get their share of stock, as much as 10 percent off the top (after deducting another $40 million in bankruptcy costs). And Capgemini, FairPoint’s consultants on the transition from Verizon operation of the landlines, will get $30 million in cash – the only unsecured creditor to get 60 percent of its debt paid off.

The banks, which will get 98 percent of the remaining equity for advancing another $75 million, also have been promised that they will get half of their debt paid off – $1 billion – in cash.

This is no coincidence. FairPoint wanted bondholders to advance another $25 million on very short notice. The bondholders, who had already readjusted their debt to accommodate the company, said no.

“We worked hard to solve our financial issues by dealing just with the bonds, but at the end of the day that didn’t work for a variety of reasons,” said Hauser. “So we decided to deal with the banks.”

That decision, made in December, meant that there would be a “distinct possibility” of filing for Chapter 11 bankruptcy protection, Hauser said, though the company didn’t make a final decision on reorganizing until the Oct. 26 filing.

Nothing for shareholdersThe bondholders have been the first to squawk at the deal. They are calling for appointment of a special examiner to investigate the deal to see if any fraud is involved.

“The debtors’ actions,” said the bondholders “reveal a pattern of misrepresentation and questionable decision-making, which merit investigation by an independent third party.”

Everything FairPoint says, contend the bondholders, should be taken with a large “grain of salt.” The fact that FairPoint’s financial condition plummeted the way it has is “astonishing,” raising questions about FairPoint’s “veracity or the competence of management (or both).”

Specifically, the bondholders asked:

• Why did FairPoint’s board buy Verizon’s landline and Internet service at such a high price in the first place?

• Why did the company have so many technical problems during the transition?

• Why did the company give out a $27 million stock dividend in January when it was having cash flow problems?

• Why did it appoint Hauser – an insider board member – to take over as chief executive, as opposed to an outsider with more telecommunication experience?

• Why did FairPoint settle with Capgemini, the consulting firm that is “principally responsible for their systems integration problems?”

• Why would the executives responsible for the mess get more of the new company than the bondholders?

According to the FairPoint filing, 25 to 30 top executives would get 1.625 percent of the stock in the new company, with additional restricted stock up to 4 percent of the company to be available for future grants. The top 75 to 80 executives would also get 3.5 percent of the company in stock options on the transition to the new company, with as much as 6 percent to be available for future grants.

“It is incredible that the very same management team that has brought the Debtors to this point could now seek to so richly reward themselves while wiping out unsecured creditors,” said the bondholders

What the other unsecured creditors have to say about the deal remains to be seen. They include: the National Exchange Carriers Association, $5.8 million, for setting national tariffs for long distance service; New Hampshire Electric Cooperative, $418,000 for renting utility poles; and Anthem Blue Cross and Blue Shield, $136,000, presumably for health insurance.

But bondholders and unsecured creditors will get more under the plan then stockholders.

“The plan as we filed it would not have anything for the shareholders,” Hauser told NHBR.

Of course, there is no guarantee that the plan will be accepted by the bankruptcy court, which is why some shareholders might still be trading FairPoint stock over the counter – albeit at a price not much more than a dime a share.

Hauser added that executives paid in equity in the past “are hurt like any other shareholder,” but that is not the reason they are getting share in the new company. “It’s not to make up for the past, it is to pay for the future,” he said.

Plummeting valueFairPoint fell into bankruptcy for several reasons, said Hauser. “Certainly, the operations system – there were that set of problems. Certainly, the general economic situation. And thirdly, the interest rates on the bonds were higher than contemplated,” he said.

Perhaps the biggest death blow – according to the filing – was the credit collapse and failure of financial firm Lehman Brothers, which resulted in the loss of nearly $30 million of available credit to FairPoint. To make up for that, the company engaged in some credit default swaps, and it now owes $88 million on those.

Meanwhile, it was refinancing the debt it held to bondholders, resulting in short-term interest rates as high as 17 percent –the best the company could do under the current market.

The weak economy, increased competition and the flawed transition from Verizon to FairPoint cut into the customer base. Consolidated revenues dropped some $45 million, to just under $300 million, in the first half of 2009.

While FairPoint didn’t anticipate the problems that led up to the filing, the filing certainly wasn’t unanticipated. The company had missed a $42 million payment last month and warned in its last quarterly statement that it might file under Chapter 11.

By the time the company filed, it had $2.7 billion in debt and was paying $200 million in interest as well as $83 million in other bills. Meanwhile, its stock price was plummeting so quickly that it was in danger of being delisted from the stock exchange. On June 30, the end of its last quarterly filing, FairPoint’s was already down to $1.2 billion in total stockholder equity, compared to some $23.8 billion at the beginning of the year.

Bob Sanders can be reached at bsanders@nhbr.com.