FairPoint Communications Starts Next Chapter of Its Story: Chapter 11

| Oct 28, 2009 | Business Network Services - U.S. | Competitive Intelligence Report

| Analyst: Cindy Whelan

Current Perspective: Negative
Vendor Importance: Very High
Market Impact: Moderate

Event Summary

October 26, 2009 -- FairPoint Communications has reached agreement on a financial restructuring plan with lenders that hold more than 50% of the company’s outstanding $2.7 billion in debt, and FairPoint and its subsidiaries have filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Under the proposed terms of the agreement, FairPoint’s $2.7 billion in debt and other obligations will be reduced to $1.1 billion and it will not have to pay nearly $170 million in annual debt service requirements. In addition, the company will have use of a $75 million debtor-in-possession revolving credit facility to ensure liquidity during the restructuring process. The agreement is subject to approval by the U.S. Bankruptcy Court.

Analytical Summary

• Current Perspective: Negative on FairPoint’s decision to file for bankruptcy, because the move proves that the carrier took on more than it could handle when it acquired Verizon properties in Maine, New Hampshire, and Vermont in April 2008. During the approvals process, regulators, consumers, and others expressed concern over the ability of a relatively small provider such as FairPoint to integrate an operation that was more than triple its size without impacting service to customers. FairPoint has struggled to overcome the provisioning, billing, and maintenance problems that have plagued its integration efforts from the start, and the bankruptcy filing gives the carrier some time to fix the problems and get the business back on track.

• Vendor Importance: Very high to FairPoint, because the filing gives the carrier some needed breathing room in order to turn its business around. Historically, independent local exchange carriers (ILECs) are solid financially, with positive cash flow. FairPoint’s struggles to integrate the Verizon operations not only impacted its retail revenue stream, but also caused the carrier to incur high penalties for substandard wholesale services to other providers, compounding the financial pressures. On top of this, the carrier needed to service the $1.6 billion in debt that it took on as part of the acquisition. The Chapter 11 proceedings will relieve the pressure from interest payments and provide the carrier with cash to keep the business going and to rectify its operational problems.

• Market Impact: Moderate on the business network services market, particularly independent local exchange carriers, because FairPoint’s filing follows on the heels of the December 2008 bankruptcy filing of Hawaiian Telcom, a LEC also formed from the divestiture of Verizon holdings. There have been several consolidation deals in recent years that appear to have gone smoothly, notably the mergers that resulted in the formation of CLECs One Communications and PAETEC and ILEC Windstream. Consolidation of providers that focus on traditional voice access lines in rural and semi-rural regions will continue; however, given the problems now associated with Verizon’s rural spinoffs, carriers seeking to acquire divested incumbent LEC properties (such as Frontier) can expect to see heightened scrutiny by regulatory agencies to ensure that voice and broadband services in mostly rural regions are maintained or improved.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

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Recommended Competitor Actions

• The provisioning, billing, and customer support problems that FairPoint has experienced through 2009 have made it easy for cable operators to attract FairPoint customers with their triple-play digital phone, television, and Internet packages. Many customers are already unhappy with the carrier; a cable operator touting competitive services should have little trouble winning over many customers.

• CLECs in Maine, New Hampshire, and Vermont that do not rely on FairPoint for UNE-L or special access services need to make this fact known to end users, to reassure these customers that their services are stable and expected to suffer no disruption as a result of FairPoint’s problems.

• The problems that have resulted from the FairPoint integration of former Verizon properties are likely to influence regulatory review of the proposed acquisition of Verizon properties in 14 states by Frontier Communications. Verizon and Frontier put conditions in their agreement intended to ensure that the integration with Frontier goes smoothly, but these carriers should be prepared to address even more stringent conditions that regulators may require before the deal is approved.

Recommended End User / Customer Actions

• Consumer and business customers that have services from FairPoint do not need to take any action as a result of the carrier’s bankruptcy filing. FairPoint will continue to provide services to these customers. These customers will want to keep track of progress in the filing and keep an eye out for potential complications that may impact their service.

• Business customers that have had problems with FairPoint, or are concerned over the carrier’s future, may want to investigate alternatives. These customers do not need to take immediate action, but they should understand what their options are and be prepared to make changes if they experience further problems with service from FairPoint.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

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