Broadband Internet access provider Covad has announced plans to file for Chapter 11 bankruptcy protection on Wednesday as part of a debt-restructuring agreement with its bondholders.
The filing follows the Santa Clara, Calif.-based company's inadvertent release of a press announcement last week that said Covad was going to seek protection from its creditors.
Covad says the filing is part of a pre-negotiated plan to restructure its $1.4 billion in debt. According to the terms of the agreement, the company's bondholders will receive 19 cents on the dollar for the face value of their high-yield and convertible bonds and $26.5 million in cash, as reported earlier. They will receive preferred stock that is convertible into approximately 33 million common shares, or about 15 percent of the company. Covad will set aside $100 million dollars that will be given to the holders of the preferred shares in the event the company is liquidated.
Covad's bankruptcy announcement, though not unexpected, underscores the difficulty that independent high-speed Internet access providers have had in keeping their businesses afloat. Broadband access provider MegaPath Networks announced earlier on Wednesday the launch of its BroadbandRescue program, which allows current business customers of ISPs that are going under to switch to its network. Current business customers of access provider RhythmsNetconnections, set to terminate services next month, will receive discounts for switching to the program, according to a statement released by the company.
News of Covad's filing sent the company's shares tumbling 11 cents, or 18.3 percent, to 49 cents from the intra-day high of 61 cents. The stock is now down $20.45, or 98 percent, from its 52-week high of $20.94.
Still, Chuck McMinn, chairman of the board, expressed high hopes for the future of his company nd demand for broadband Internet services.
"The demand is out there in spades," he said of Covad's services. "There are many more people who don't have a broadband connection than do." He said that his company signs up between 700 and 800 lines each day.
McMinn said current customers will be "absolutely unaffected" by the filing. "This is a filing by Covad Communications Group used as a mechanism to implement an agreement that we have already reached with our bondholders. None of this has had any impact on the services we provide. It's business as usual on the operating side."
McMinn also dismissed the idea of a possible buyout of the company, saying he would prefer that potential suitors put their volume on Covad's existing network. "Then we can be the broadband provider of choice for all the telecommunications players. We don't do their business, and they shouldn't try to do ours."
McMinn expects the transaction to be completed by January 2002, and he says Covad has "more than enough" cash to continue through the first quarter of 2002 before needing to raise additional capital.
