Otelco Files for Chapter 11 Bankruptcy Citing Lower USF Reimbursements
Otelco, a wireline provider for several states, filed for Chapter 11 bankruptcy protection in Delaware Sunday, in order to restructure. The company, which is incorporated in Delaware, has $168.5 million in assets and $310.06 million in total debt, according to documents filed at the Wilmington, Del., bankruptcy court. Otelco operates 11 RLECs throughout Alabama, Maine, Massachusetts, Missouri, Vermont and West Virginia as well as two CLECs providing telecom service in Maine, New Hampshire and Massachusetts and is “the sole wireline telephone services provider for many of the rural communities it serves,” the documents said.
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Otelco’s day-to-day operations will continue and the bankruptcy filing will not affect customers, the telco reassured investors Monday (http://bit.ly/14pXhUG). It said it would finish its restructuring by the end of the second quarter, citing support for the plan from the entirety of Otelco senior lenders and from senior subordinated note holders who chose to cast ballots, representing more than 96 percent of total dollars. Otelco had mailed ballots to senior note holders Feb. 13 and set a return deadline of March 15, it said in late February (http://bit.ly/YtGbUm).
"Two major developments occurred in 2011 and 2012 that impacted the Company’s decision to restructure,” Otelco CEO Michael Weaver told the court. “In June 2012, Time Warner Cable officially notified the Company that it would not renew its contract with the Company for wholesale network connections.” Weaver also mentioned the FCC’s November 2011 USF order as a cause. That order called for “making substantial changes to the way telecommunications carriers are compensated for serving high cost areas and for completing traffic with other carriers, requiring a lowering of intrastate access rates,” he wrote, saying it’s “expected to impact aspects of the Company’s operations in the future.” He estimated the company’s cash flow would drop from “a range of $40-$50 million in prior years to approximately $28-$32 million beginning in 2014,” which makes it not “feasible” for the company to manage its $250 million in debt. In a Monday statement, Weaver called the plan “the best possible outcome for the Company and our IDS unit [Income Deposit Security, common stock] holders.” In his February letter to stockholders (http://bit.ly/XC1Zan), Weaver said that as a holder himself, “I am disappointed in the cancellation of the common stock, but I support the plan” due to the objectives it’s slated to accomplish.
The company announced its restructuring plan Feb. 1. Otelco described the plan then as “deleveraging its balance sheet and reducing its overall indebtedness by approximately $135 million,” according to a company press release (http://bit.ly/YAbkCK). “Otelco has reached an agreement with its senior lenders to amend and extend the terms of its current senior financing through April 2016.” It plans to cancel IDS units and convert existing senior subordinated debt into equity, it said. “The vast bulk of our subordinated debt is held in the IDS units, and, as such, our IDS unit holders will continue to be significant shareholders of the Company as they are today,” Otelco said in a February press release, noting the actions will “significantly reduce” its debt. The Chapter 11 plan’s purpose is to “enable the Company to reduce its debt leverage and better position the Company to compete in the telecommunications and information technology industry, and to provide a solution for the impending maturity of its Senior Secured Term Loan on October 31, 2013,” Otelco told the court this week. “When we emerge from bankruptcy, 92.5% of the stock of the Company will be owned by IDS holders and the other holders of our subordinated debt,” Weaver said in his February letter to stockholders. The bankruptcy court must approve Otelco’s restructuring plan.
The telco owes money largely due to trade debt. Its unsecured claims from creditors include, as of this past weekend, $379,807 to Arab Electric Cooperative, $282,768 to FairPoint Communications, $135,170 to Level 3 Communications and $97,222 to the National Cable Television Cooperative, among several other smaller claims. The court documents say these represent maximum potential liabilities and actual amounts owed may be lower.
In February, Otelco reported 2012 revenue of $98.4 million and operating loss of $129.4 million. “During 2012, our access line equivalents declined by 2.4% due solely to a reduction in residential access lines -- a decline which was partially offset by modest gains in business access lines and high-speed Internet customers,” Weaver said then. Its access line equivalents, defined as voice access lines and data access lines, were 102,378 at the end of 2011 and were down to 99,935 by the end of 2012. That number still places the telco as one of 25 largest local exchange carriers in the U.S., it said.
Otelco will present its case before a bankruptcy court judge in Wilmington Tuesday afternoon, the court said in a hearing notice Monday.