KPNQwest collapses

KPNQwest NV yesterday joined Global Crossing, Williams Communications, and many carriers yesterday when it filed for bankruptcy protection yesterday.

The Hoofddorp, Netherlands-based carrier announced early yesterday morning that it might have to seek protection under Dutch moratorium law from its creditors, after all the members of its supervisory board resigned. However, only hours later it admitted that it thrown in the towel and joined the growing list of failures in the telecommunications sector.

Last week the banks pulled the plug on the company's credit facility, which meant that it could no longer meet its funding requirements for the year. The banks, which hold a substantial portion of the company's assets as collateral including most of its remaining cash, are insisting that any agreement would have to involve certain asset sales, which so far KPNQwest has not been able to deliver.

The disbanded supervisory board was made up of two independent directors and three representatives from its parent companies - two from Dutch carrier KPN NV, and one from US telco Qwest Communication.

Last month, 40% owner KPN publicly stated that it would not be putting more finance into the company after its joint venture with Qwest issued a profit warning. The gloom is a far cry from the ebullience exuded by CEO Jim McMaster only months ago.

Last October, the company bought the Ebone and Central Europe businesses of Global TeleSystems Inc (GTS) for 210m euros ($193m) of new convertible bonds and assumed 435m euros ($400m) of net bank debt and capital lease obligations.

Previous to that, McMaster revealed that sales people who managed to take a customer from a rival that had defaulted on its bond payments or filed for bankruptcy protection, would get double their normal sales commission.

McMaster's optimism centered on his belief that the company was fully funded, and indeed it did actually manage to become EBITDA positive in 2001, and it had projected to generate free cash flow in 2003. However, after the collapse of Global Crossing in February this year, KPNQwest started to unravel.

It admitted that 120m euros ($105.6m) recorded in revenue last year - amounting to 15% of the total - were sales of optical capacity to carriers from which it had purchased capacity assets, and one of its parents, Qwest, became the subject of an investigation for its role in possibly fraudulent transactions involving IRUs, some of which could have involved KPNQwest. It also transpired that much of its revenue came from its parents, both of which were making cutbacks.

Soon came the inevitable profit warning, as the company entered its death spiral. The remains of the company are likely to be sold off at substantial discounts, as the supply for IP networks far exceeds the demand.

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