XO offers new reorganization plan

Copyright 2002 The Deal L.L.C.
The Daily Deal...05/16/2002
From LexisNexis

By Jonathan Berke
from CED Broadband Direct, May 16, 2002

Though Theodore Forstmann and Carl Icahn have made initial plays for control of beleaguered XO Communications Inc., the company's senior bankers could end up playing a significant role in the company's reorganization.

In its quarterly report filed earlier this week, the Reston, Va.-based broadband provider outlined a "stand-alone" business plan under which it would conduct an equity rights offering for its unsecured creditors and current shareholders in case other reorganization proposals fail.

The senior bankers would then "backstop" the offering by acquiring additional equity or secured debt in the reorganized company if the earlier offer does not yield the capital needed to implement the reorganization.

"We've said all along that we are trying to get a deal done that would stabilize the company financially," an XO press officer said. He added that this third reorganization plan is very much in the "preliminary stages."

In January, XO reached an agreement with Forstmann Little & Co. and Telefonos de Mexico S.A. de C.V. to inject $800 million into XO in exchange for a 78 percent stake in the reorganized company. Under this plan, bondholders would receive $220 million in cash and a 20 percent stake in the reorganized company, while management would get the remaining 2 percent stake.

New York-based Forstmann owns a 24 percent stake in XO.

Icahn, meanwhile, has accumulated nearly one-third of XO's bonds over the past few months, so he could potentially block the Forstmann-backed proposal if XO files for bankruptcy. If XO filed, it would need two-thirds of its bondholders to approve Forstmann's plan.

In a competing offer to Forstmann's, Icahn is offering to inject $550 million in cash in exchange for a 55 percent equity stake in XO, with non-Icahn noteholders getting the remaining 45 percent.

Also, the Icahn plan calls for a stock option plan covering 14 percent of the reorganized XO's stock for management and employees of the company. The plan would dilute the stake of both Icahn and non-Icahn bondholders in the new company.

Representatives for Icahn and Forstmann did not return calls for comment.

The reorganization plan involving XO's senior bankers could provide a backstop for the company if XO files for bankruptcy and the Forstmann plan is vetoed, or if Icahn withdraws his offer. The XO spokesman would not say which banks are interested in this plan.

XO's bank group has been fairly generous with the company. Formerly known as Nextlink Communications Inc., XO entered a $ 1 billion credit facility in February 2000 that is administered by a branch of Toronto-Dominion Bank Inc. and syndicated by a Goldman Sachs & Co. affiliate. J.P. Morgan Chase & Co. and Barclays Bank plc are were also part of the original syndicate, according to Securities and Exchange Commission filings.

Though XO breached certain covenants against the facility and a forbearance agreements expired late last month, the bank group has so far cut the company some slack. The banks technically could have exercised remedies that would have placed XO in bankruptcy by now.