Verizon Deal Has FairPoint Staggering, SEC Filing Shows
Wariness is the watchword regarding FairPoint among state regulators in New England, where the telecom acquired Verizon operations, assuming a debt load FairPoint now is trying to restructure. In a June 24 filing to the SEC, FairPoint listed bankruptcy among options it could consider if a proposed debt exchange doesn’t succeed (CD July 1 p10). The exchange offer involves about $500 million in bonds at 13-1/8 percent interest.
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“It’s obviously a very difficult situation,” said a representative of Vermont’s Department of Public Service. For months, that office subjected the FairPoint/Verizon deal to extensive scrutiny, as did its counterparts in Maine and New Hampshire. The acquisition also was challenged by unions representing Verizon workers. When the deal went through, Verizon had 1.6 million landline customers and 230,000 Internet customers in the three states. “Our department wants to work with FairPoint and help get them back on track,” the Vermonter said. “We are consulting legal experts on the details of bankruptcy. We want to be sure that Vermont consumers are protected, and we will do whatever we can to ensure that the company delivers the reliability, the service and the buildout that it guaranteed in the talks that led to the department’s approval of the acquisition.”
FairPoint Chairman David Hauser hopes to avoid the bankruptcy route, he has told the media. Hauser began his new job at FairPoint Wednesday. His compensation package includes options to buy 1.6 million shares of FairPoint common stock and nearly 524,000 restricted shares of common stock at $0.95 per share. Hauser also stands to get $1.75 million in restricted stock on July 1, 2010, and July 1, 2011. Based on how the company does between his start date and Dec. 31, 2011, he also is in line for awards of common shares. The bonuses are targeted at between 200 percent and 400 percent of Hauser’s $800,000 annual salary, the company said in a release.
In last week’s submission to the SEC, FairPoint said it is collecting less cash than expected. According to the filing and an accompanying news release, the company’s $2.3 billion acquisition of Verizon phone lines and Internet operations in Maine, New Hampshire and Vermont has it struggling.
A spokesman for Maine’s Public Utility Commission stressed the pro forma nature of FairPoint’s invocation of bankruptcy as an option in its debt restructuring effort. “It is serious, obviously,” he said. “It [bankruptcy] is identified as a possibility, as the SEC requires. Maine’s commission is prepared to participate in any federal bankruptcy court action that may arise,” he told us. “We will engage in the process as a participant or in another pertinent capacity, as appropriate, to secure the regulatory obligations described in our approval.”
FairPoint is being advised by Rothschild, the Maine official noted. “The company had explained in previous communications with the Maine, New Hampshire and Vermont commissions that it would be seeking advice on restructuring its debt,” he said. “This latest announcement seems to be a step in that process.”
Maine Consumer Advocate Richard Davies voiced guarded optimism about prospects for FairPoint’s efforts to shed high-interest debt. “We've been aware of the company’s struggle with its debt load, which increased with the purchase of the Verizon territories,” Davies told us. “Unfortunately, it came when the economy was looking good, and a few months later the bottom fell out.”
Authorities in Maine and the other states have been working for some time with FairPoint to resolve the situation, Davies said. As the deal with Verizon was being completed, FairPoint proposed a debt restructuring similar to but smaller than described June 24 to the SEC, he noted. “They had some small financing at high interest on which they sought permission to waive the quarterly payments. They wanted to use the cash to buy down other securities and lower their debt level,” Davies said. “We didn’t buy their original proposal, but working together we were able to hammer out an agreement that let the company save some money.”
FairPoint’s course of action “seems to be a reasonable approach to getting their finances under control,” Davies said. “It’s a short-term solution. The hope is that, as the economy stabilizes, we won’t be looking at 13 percent bonds, and FairPoint can refinance the whole group. They're buying time.”
FairPoint has the potential to be “a good, stable company if it gets past these problems,” the advocate said. “We're waiting to see how they pull it off with the bond markets. If they can’t do that, they'll have much more significant trouble, in the serious-to-critical range. But there’s time. The October debt payment has a 30-day grace period, so the soonest that we'd be talking about default would be early November. As to what might happen after that, we'd just as soon not find out.”