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XO Rejects Bondholders' Restructuring Plan

XO Communications, Inc. has rejected a restructuring plan proposed by its' bondholders over the weekend that would put the troubled broadband carrier in Chapter 11 bankruptcy. The new plan emerged after billionaire investor Carl Icahn, who, along with two other investors, holds $1 billion in XO debt, said he was opposed to XO's current plan to have Forstmann Little & Co. and Telefonos de Mexico S.A. de C.V. (TelMex) invest $400 million each in exchange for an 88 percent equity position in the Reston, Va.-based company.

The plan proposed by the XO's bondholders called for the bondholders to invest approximately $600 million in the company and receive in return 100 percent equity in XO in a reorganization that take the company into Chapter 11 protection.

"XO has received a preliminary proposal from certain holders of its senior unsecured notes regarding the terms of a potential financing and restructuring that is intended to replace the investment and related transactions provided for in XO's existing agreements with certain funds affiliated with Forstmann Little & Co. and Telefonos de Mexico S.A. de C.V. (TELMEX)," an XO statement declared. "XO's board of directors, with the assistance of its financial and legal advisors, has carefully reviewed this proposal and concluded that it does not represent a feasible alternative for the successful restructuring of the company. Based on this assessment, the company has elected to reject the noteholders' proposal."

The statement also said XO plans to move "promptly" to implement the Forstmann-TelMex agreement. According to the XO statement, "The Forstmann Little/TELMEX proposed restructuring is clearly superior and will permit the company to complete its financial restructuring and raise the funding needed to secure the company's future."

Following the restructuring, Forstmann Little and TelMex will each own 39 percent of the company's outstanding equity. The remaining equity, other than that allocated to the company's employees, is expected to be held primarily by holders of the company's senior notes. Consequently, current holders of the company's equity securities are expected to lose substantially all of the value of their investment as a result of the restructuring.

XO has had trouble selling that deal, though, and has threatened to file to bankruptcy, perhaps as early as this week, in an effort to pressure stockholders into accepting the Forstmann-TelMex offer.

Icahn stepped into the controversy Thursday night by issuing a press release urging noteholders to reject the XO restructuring plan. XO was quick to counter Icahn's criticism.

"XO has reviewed the press release issued by Mr. Icahn announcing his opposition to XO's proposed debt restructuring in connection with the investment by Forstmann Little & Co. and Telefonos de Mexico S.A. de C.V.," XO responded in its own press release. "As previously announced, XO has reached a definitive agreement under which Forstmann Little and TelMex would invest $800 million in the company subject to the satisfaction of specified conditions including the completion of a balance sheet restructuring."