Model behavior? - Commentary - Chapter 11 bankruptcy as a business plan

Telecommunications, May, 2002

As more and more carriers struggle in this tough telecom market, a new financial model is emerging: Chapter 11 bankruptcy as a business plan. It's scaring the heck out of a lot of folks--and not just those going through the debt restructuring process. Their competitors (some of them teetering on the brink themselves) are also worried that companies such as Global Crossing, Yipes and McLeod USA--to name a few of the dozens of service providers that have sought Chapter 11 protection in the past few months--will surface from the restructuring debt free, lean and mean with the ability to offer cut-rate pricing to win back old customers and attract new ones.

When they use their heads and not their hearts, the survivors realize that these carriers--although debt free--will also come forward on a very tight leash from their creditors and still have a tough row to hoe. They have to slash costs, clean up their balance sheets and streamline business plans. Any discounted pricing they are able to offer will be likely short lived. They also face a steep uphill battle in terms of customer credibility: It's tough to convince customers you'll be around for the long haul when you've just declared bankruptcy.

Yet the thought scares me that some carriers--some in bankruptcy and some not--are seeing some sort of competitive advantage in a Chapter 11 filing. The belief is definitely out there: Competitive providers and incumbents alike are questioning how this will affect their businesses. At the recent IBN Summit in New Mexico, one broadband service provider CTO worried that other companies' Chapter 11 restructurings might drive his company down the same route.

I related parts of that conversation to a large IXC CTO and learned the incumbents have similar fears, at least short term. "Long term, I don't think it's too much to worry about because the terms of coming out of a Chapter 11 restructuring are stringent," the CTO said. "Short term, however, it could be a real problem for some service providers because of pricing issues." Dan Caruso, vice president of network business for Level 3, raised the same question in his presentation on business drivers in the optical networking market: Will the Chapter 11 survivors be able to conquer the world? "Not all the pieces of these providers will survive, and all of them will face significant challenges," Caruso said, "but it's a very real question."

Sue O'Keefe

Editor in Chief