Covad to File for Bankruptcy

Covad Communications Group, Inc., announced Wednesday it
plans to cash in its bonds through a Chapter 11 bankruptcy debt
restructuring filing in mid-August, which would free the company from $1.4
billion in debt and leave the company with $250 million in cash.

Officials said a majority block of bondholders agreed to convert their
bonds for a combination of Off-The-Counter Bulletin Board shares and 19
cents per bond. All told, bondholders would received $283.3 million in
cash and 33 million shares.

The announcement comes after creditors started issuing warnings to Covad
executives to stop “wasting its remaining cash assets.” In May,
bondholders said Covad had about $600 million in cash but expected to lose
$450 million of that for the year.

The move, subject to legal approval, would give the troubled data
competitive local exchange carrier (DLEC) some breathing room to get its
operations profitable as it continues to acquire customers and trim
operating costs.

It’s uncertain whether a federal judge will decide if Covad has a chance to
succeed with a debt restructuring. If not, the judge can rule against the
Chapter 11 reorganization and counsel a Chapter 7, or liquidation,
proceeding.

In that case, bondholders would get as much money back as Covad’s assets
are worth. Bondholders stand to lose a considerable amount on their loans
if Covad doesn’t have much in the way of cash and can’t get much money for
their equipment and subscriber base.

It’s similar to what happened to defunct DLEC NorthPoint Communications,
Inc., which filed for Chapter 7 bankruptcy protection earlier this year and
only got $135
million
for their troubles. Creditors were left with a defaulted loan
and are currently looking to recoup losses in a lawsuit
against Verizon Communications .

Charles Hoffman, Covad president and chief executive officer, said the move
puts them in a more comfortable position and leaves them only $200 million
short of the monies it needs to make it to the third quarter of 2002, when
he expects
the company to operate cash-flow positive.

“Covad will be in a much stronger financial position going forward, with no
debt and a much smaller cash requirement, if this transaction is
successful,” Hoffman said. “With the growth in our revenue and continued
reduction of costs, all of which put us on a faster track to profitability,
we expect to be in a much better position to raise the additional funding
we need.”

Despite an uneasy relationship with many Internet service providers
(ISPs) around the nation, some are calling the move a good one that keeps
Covad away from insolvency and puts ISPs back under the thumb of incumbent
local exchange carriers (ILECs) like Verizon.

Harry Taxin, president and chief executive officer of DSL provider MegaPath
Networks, said the Chapter 11 filing would be good for the DSL industry in
general.

“This is a very positive step for Covad and we are pleased to hear that the
financial issues are in the process of being resolved so as to move the
company toward long-term success,” Taxin said. “The industry needs a
strong, independent data CLEC provider, and this news will help the DSL
industry continue its rapid growth by ensuring that the supply chain is
viable and stable.”

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