XO Moves Closer to $800 Equity Investment

XO Communications, Inc. has reached a definitive agreement with Forstmann Little & Co. and Telefonos de Mexico S.A. de C.V. (TelMex), Mexico’s largest telecommunications firm, on the terms of their previously announced intention to invest $400 million each in XO in exchange for new equity in the company.

The agreement is subject to a number of conditions, including XO successfully completing a restructuring of its existing balance sheet and receipt of regulatory approvals.

Following the balance sheet 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.

The Reston, Va.-based XO is in discussions with the institutions that are lenders under its secured credit facility regarding modifications to that facility and with representatives of the holders of its senior notes regarding a restructuring of that debt, all in an effort to reach terms with those creditors that satisfy the restructuring requirements contemplated by the definitive agreement with Forstmann Little and TelMex.

When the deal was originally announced in late November, XO said it would not make scheduled interest and dividend payments on its unsecured notes or preferred equity securities after Nov. 30. Wednesday morning, XO announced it has reached a forbearance agreement with the lenders under its secured credit facility in which the lenders have agreed, subject to certain conditions, not to exercise their remedies under the credit facility with respect to certain cross default events and to the covenant in the credit facility relating to XO’s fourth quarter minimum revenues.

The agreement contemplates that the lenders’ forbearance will continue until April 15 in order to provide the company with an opportunity to reach agreement with its creditors regarding the terms of the proposed balance sheet restructuring.

The restructuring is expected to result in XO having total debt outstanding of no more than $1 billion of senior secured debt in addition to its existing capital lease obligations.

At the end of the third quarter, XO had more than $1 billion of cash or cash equivalents, which will allow the company to continue its business operations, without interruption, during the financial restructuring.

Proceeds of the investment will be used to fund the continued development of XO’s broadband telecommunications networks, on-going business operations and to complete the balance sheet restructuring. Once the investment and restructuring are complete, XO is expected to have a fully funded business plan.

XO is one of North America’s largest holders of fixed broadband wireless spectrum, with licenses covering 95 percent of the population of the 30 largest U.S. cities. The company has built a fiber and wireless broadband communications network serving 63 metro markets throughout the United States. These markets are connected by XO’s IP backbone network. The company offers a wide range of services including local and long distance voice, Internet access, virtual private networking (VPN), ethernet, wavelength, Web hosting and integrated voice and data services.

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