PSINet Files For Chapter 11

PSINet and 24 of its units have filed for Chapter 11 bankruptcy protection as they struggle with rapidly declining demand, the Internet access provider said Friday.

The Ashburn, Va.-based company is the latest high-tech concern hurt by the slowing U.S. market, stiffer competition, the inability of customers to pay their bills and the recent drying up of the capital markets. At the time of the filing, PSINet had total assets of $2.2 billion and total liabilities of $4.3 billion, of which $2.9 billion is bond debt.

PSINet, with cash assets of about $300 million, filed for protection in the U.S. Bankruptcy Court for the Southern District of New York. Analysts say they had been expecting such a move for about the last six months. The company has retained Dresdner Kleinwort Wasserstein as its investment banker and restructuring advisor.

"They lost the confidence of the Street, had too much debt and were burning through too much cash," says Jonathan Savas, director of high-yield telecommunications research at Merrill Lynch.

Savas adds that PSINet, which also provides Web hosting services that run corporations' Internet sites, also had some poorly timed acquisitions that it had problems integrating.

"We expect that the steps we are taking today will provide us with the flexibility and time to explore all strategic alternatives while we continue to deliver the reliable service upon which our customers depend," says PSINet president and CEO Harry Hobbs.

Nortel Has Biggest Unsecured Trade Claim

Wilmington Trust , as trustee, is the largest unsecured creditor, with more than $2.7 billion of debt. The largest unsecured trade creditor, according to the bankruptcy filing, is Nortel Networks, with $99.7 million in claims. The largest other unsecured trade creditors include Cisco Systems, with $81 million; Broadwing Communications Service, $27.5 million; Leastec, $26.3 million; GE Capital, $21.3 million and Lucent Technologies Inc., $20.7 million.

PSINet, whose stock has been delisted from the Nasdaq, had earlier defaulted on $2.73 billion of debt, according to Standard & Poor's, in the largest telecom bond default since passage of the Telecommunications Act of 1996, which was designed to encourage competition.

Katie Heagy, an investment analyst at Federated Investors in Pittsburgh, says PSINet may be one of the last big high-tech companies to file for bankruptcy protection, but some smaller players may still have to go that route.

Telecoms NorthPoint Communications Group, Winstar Communications and Viatel are among the companies that filed for bankruptcy protection this year.

PSINet says its cash balance will provide sufficient financial resources to fully fund operations during the anticipated restructuring period. It says therefore it declined the various debtor-in-possession financing options it received.

Looking At All Options

PSINet says it continues to evaluate all strategic alternatives, including the sale of the company and the viability of a stand-alone reorganization.

Earlier this month, British telecommunications company Cable & Wireless said it was mulling the purchase of certain PSINet assets but was in no rush to spend its money.

With so many assets on the market, Merrill Lynch's Savas says, it is difficult to ascertain what the ultimate recovery value for the company would be. PSINet will probably do several small asset sales, he adds.

Four Canadian units have also filed for protection in the Ontario Superior Court of Justice. The company says Canadian telecommunications company TELUS has offered to buy its Canadian operations.

The proposed purchase is subject to conditions, including regulatory approval and approval under the bankruptcy proceedings.

PSINet agreed to sell its Panama operations to REE Panama for stock and has closed on the sale of substantially all of its Puerto Rico operations. Terms were not disclosed.

The filings do not involve PSINet's operating units in Asia, Europe, Latin America or its Metamor consulting business, all of which the company expects to continue to operate independently. However, PSINet says it is considering all strategic options for its operations in Latin America and is in talks with a potential purchaser group.

The company says it has asked the courts for permission to continue to pay its employees. It also says it plans to pay vendors on a timely basis for goods and services they deliver after the filing date.

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