Covad officially out of Ch. 11, closes $150 M in funds
Covad Communication broke out the champagne as it officially emerged from bankruptcy today, eliminated $1.4 billion in debt and announced it closed $150 million in deals with SBC Communications. The two moves were highly contingent on each other, and allow the company to forge ahead "basically debt-free" and well-funded, says President and CEO Charles Hoffman.
"The plan that we came up with last spring came to fruition," Hoffman says.
Last week, a bankruptcy court judge approved Covad's restructuring plan, allowing it to emerge from bankruptcy and close the deals with SBC, which had hinged its agreements on the judge's approval of the plan. Conversely, one reason the judge had approved the plan was because of SBC's funding waiting in the wings. SBC and Covad announced earlier the two would rearrange terms of previous deals to allow upfront payment from SBC on Covad services. The move would provide the funding Covad needed to not only emerge, but to move forward.
That was key in the judge's decision, Hoffman says. "From the judge's point of view, it's one thing to say you're out of bankruptcy, (but) will you survive?"
The funding indicated Covad would, he says.
The$150 million SBC/Covad deals — of which $135 million is cash — have four funding elements, and two main ones, Covad co-founder and Executive VP of Marketing and Strategy Chuck Haas said last month when the deal was announced. Key are a $50 million, four-year secured loan with the interest deferred for two years. The second, he said, is a $75 million prepayment for Covad's services.
A third element entails payment to Covad of a $10 million restructuring fee in exchange for Covad eliminating SBC's revenue commitment under an original resale and marketing agreement the two established in September 2000. Likewise, SBC eliminated a $15 million co-op marketing fee from the original deal.
Covad filed for a pre-negotiated Chapter 11 bankruptcy in August, which did not affect its operating companies, it said then.
Still, "There was this cloud over Covad and DSL," Hoffman says. Its ISP customers were reluctant to sell its products, but with last week's approval, orders have begun to pick up, he says.
SBC and Covad depict strange bedfellows — the two are archrivals on the Tauzin-Dingell bill, on which the U.S. House of Representatives deferred a decision until March. Despite changes in the original draft that affected line-sharing, the two still disagree over section 271 provisions in the '96 Telecom Act that affect long-distance restrictions, and on competitive access to any new facilities in rural areas that might emerge from development there.
Hoffman says the two have a good working relationship but will remain opposed on regulatory issues.