FairPoint finally files bankruptcy plan

first_imgFairPoint Communications announced today that it has resolved issues involving unsecured creditors and has filed a restructuring plan with the US Bankruptcy Court that will get rid of $1.7 billion of its $2.7 billion debt in exchange for giving most of its common stock to secured creditors. FairPoint announced October 26, 2009, that it was filing chapter 11 bankruptcy protection in a pre-negotiated deal with creditors. However, the 2,500 unionized workers and unsecured creditors continued to press the company to reach a more favorable agreement. Workers reached a new deal last week, setting the stage for today’s announcement. FairPoint has also reached agreements with regulators in Vermont and New Hampshire, but it is still in negotiations with regulators in Maine. Service will not be effected by the filing. FairPoint had put off the filing three times, the last of which on February 1. Two days later it reached a deal with unionized workers that would extended the current five-year contract in exchange for putting off raises and other concessions. FairPoint was seeking to save $30 million in employee costs. Since then, FairPoint worked on finalizing the deal with unsecured creditors, which will give them 17 cents on the dollar. The secured creditors will own 92 percent of the company, if the bankruptcy court approves the plan.FairPoint owns most of the telecommunication landlines in northern New England. It bought Verizon’s landline business in 2008. It cut over from the Verizon network a year ago, which resulted in several technical problems and customer service issues. The bonds FairPoint issued also wound up costing the company a higher rate than originally anticipated, with credit becoming harder to get because of the recent financial meltdown on Wall Street. Along with those two issues, FairPoint said the national recession also reduced revenues as consumers reduced spending at the same time competitors gained market share, all of which led to the bankruptcy filing. FairPoint insists that with the restructuring that it will be a stronger company, less burdened by debt and with more working capital that is better able to meet customer demand and compete against the likes of cable and wireless companies. FairPoint has said it counting on increasing consumer demand for broadband services to drive the business as it moves forward.BackgroundFairPoint inherited the roughly 317,000 Vermont residential and business telephone accounts that Verizon had accumulated as of 2007. FairPoint officials said in an interview with Vermont Business Magazine in early 2009 that the number had dropped to 295,000. The company acknowledged that it was losing about 10 percent of its base a year. It did not respond to a request for updated statistics, but if the 10 percent-a-year figure is applied, FairPoint probably has about 270,000 Vermont landline customers. The total for all three northern New England states may be about 1.3 million, compared to 1.5 million at the time of the takeover from Verizon.On October 26, 2009, FairPoint Communications and all of its direct and indirect subsidiaries filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of New York . The cases are being jointly administered under the caption In re FairPoint Communications, Inc., Case No. 09-16335 (BRL).FairPoint commenced the Chapter 11 Cases because of a significant need to de-leverage its balance sheet and to reduce its cost structure. In March 2008, FairPoint Communications completed the acquisition of certain landline operations in Maine, New Hampshire and Vermont from Verizon Communications Inc. through a merger with Northern New England Spinco Inc, a subsidiary of Verizon. In connection with the Merger, FairPoint and Spinco entered into a $2.03 billion secured credit facility, as subsequently amended, and Spinco issued and FairPoint Communications subsequently assumed $551 million aggregate principal amount of 13-1/8% Senior Notes due 2018. As of the Petition Date,FairPoint had approximately $2.7 billion of indebtedness, including accrued and unpaid interest and amounts owed under interest rate swap agreements, which is not sustainable. FairPoint s financial difficulties have been exacerbated by declining financial performance which can be traced to, among other things, (i) increased competition from alternative voice and data communication providers that has eroded FairPoint s traditional base of wireline voice customers (ii) the recent turmoil in the financial markets, which has significantly limited available capital and resulted in a significant decline in the domestic economy and (iii) difficulties transitioning from Verizon s systems and integrating the NNE Operations acquired in the Merger with FairPoint s historical operations.In an effort to address these issues, FairPoint s management team worked diligently to expand and improve FairPoint s product offerings, diversify and grow revenues, increase operational efficiency and operating cash flows and reduce debt obligations through, among other things, (i) investing $85 million in the build out of a new next generation Internet protocol based network, (ii) suspending common stock dividends and (iii) completing an exchange offer for certain of the Original Senior Notes for new 13-1/8% Senior Notes due 2018, which allowed FairPoint to reduce its cash interest expense for the quarters ended June 30, 2009 and September 30, 2009 and maintain compliance with financial covenants  contained in the Prepetition Credit Agreement for the measurement period ended June 30, 2009. Despite these actions, FairPoint s balance sheet remained highly leveraged, with substantial annual capital expenditure requirements and interest costs, and portions of the principal amount of the Prepetition Credit Agreement becoming due on a quarterly basis. This capital structure is not  sustainable, particularly after taking into account the impact of (i) the recession in the United States and the associated high levels of unemployment, reduced disposable income and consumer spending, increased business failures and higher than normal uncollected receivables, (ii) the continued significant capital expenditure requirements required for FairPoint to remain competitive in the telecommunications market and imposed by the regulatory orders approving the Merger and (iii) FairPoint s limited access to capital markets.As a result, FairPoint, with the assistance of its advisors, began to explore capital structure restructuring alternatives, including recapitalizations and a potential chapter 11 filing.Commencing in July 2009 and culminating in October 2009, FairPoint worked diligently, first with the holders of the Senior Notes and then with certain lenders under the Prepetition Credit Agreement, to obtain a sustainable solution to FairPoint s significant leverage. Through negotiations with a steering committee of lenders under the Prepetition Credit Agreement, FairPoint reached an agreement in October 2009 with the Consenting Lenders, who hold more than 50% of the indebtedness under the Prepetition Credit Agreement on a term sheet regarding the framework for a comprehensive balance sheet restructuring that would result in the conversion of more than $1.7 billion of FairPoint s  indebtedness into equity in FairPoint Communications. Evidencing their support of the Plan Term Sheet, the Consenting Lenders have executed the Plan Support Agreement pursuant to which the Consenting Lenders agreed to support a chapter 11 plan as substantially embodied in the Plan Term Sheet.Thereafter, FairPoint commenced the Chapter 11 Cases on October 26, 2009.Pursuant to the Plan Term Sheet, FairPoint agreed to file a chapter 11 plan that provided for the reorganization of FairPoint as a going concern. The integral components of the agreement with the Consenting Lenders included (i) $75 million of debtor-in-possession financing, which would provide sufficient liquidity to fund FairPoint during the course of the Chapter 11 Cases and (ii) the conversion of approximately $1.1 billion of the indebtedness under the Prepetition Credit Agreement into equity in Reorganized FairPoint Communications.Following the Petition Date, the Ad Hoc Committee of Senior Noteholders raised certain concerns regarding FairPoint s proposed treatment of FairPoint Communications Unsecured Claims under the Plan Term Sheet. In an effort to resolve these concerns, FairPoint, the Lender Steering Committee and the Ad Hoc Committee of Senior Noteholders entered into extensive, arms length negotiations. These negotiations ultimately resulted in certain changes to the terms contained in the Plan Term Sheet and the formulation of the Plan, annexed hereto as Exhibit A (for references, see http://docs.bmcgroup.com/FairPoint/docs/nysb_1-09-bk-16335_575.pdf(link is external)).Under the Plan, Prepetition Credit Agreement Claims (Class 4) will be satisfied in full, as follows: (i) by a pro rata share of New Term Loan in the aggregate principal amount of $1 billion, (ii) by a pro rata share of the Cash Payment, (iii) by a pro rata share of forty-seven million two hundred seventy five thousand seven hundred eighty five (47,275,785) shares of the New Common Stock in Reorganized FairPoint Communications (subject to dilution) and (iv) by a pro rata share of Cash distributable out of the Reserve (as defined herein), provided, however, that if the class of FairPoint Communications  Unsecured Claims rejects the Plan, each holder of a Prepetition Credit Agreement Claim will receive its pro rata share of fifty eight million, four hundred eighty four thousand five hundred eighty seven  (58,484,587) shares of the New Common Stock (subject to dilution), as more fully described in Section VI.C.4 ( Summary of Plan of Reorganization Treatment of Claims and Equity Interests Under the Plan Allowed Prepetition Credit Agreement Claims (Class 4) ) of this Disclosure Statement.FairPoint Communications Unsecured Claims (Class 7) will be satisfied in full under the Plan, as follows: (i) by a pro rata share of four million one hundred ninety thousand six hundred fifty one (4,190,651) shares of the New Common Stock in Reorganized FairPoint Communications (subject to dilution) and (ii) by a pro rata share of the New Warrants to purchase up to seven million one hundred forty-three thousand one hundred fifty six (7,143,156) shares of the New Common Stock, as more fully described in Section VI.D.2 ( Summary of Plan of Reorganization Provisions Regarding New Common Stock and New Warrants Distributed Pursuant to the Plan New Warrants ) of this Disclosure Statement; provided, however, that if the class of FairPoint Communications Unsecured Claims votes to reject the Plan, themembers of the Ad Hoc Committee of Senior Noteholders or its counsel objects to the Plan, the  members of the Creditors Committee or its counsel objects to the Plan, or the Indenture Trustee or its counsel objects to the plan, then the holders of FairPoint Communications Unsecured Claims will not receive any Distributions under the Plan on account of their Claims. The proposed distributions to other creditors are discussed in Section VI.G ( Summary of Plan of Reorganization Distributions under the Plan ) of this Disclosure Statement.Source: FairPoint. 2.8.2010last_img read more