MFN Aims to Emerge Early 2003

John Gerdelman is soliciting all the advice his peers have to offer, and there’s plenty of it to go around.

The topic of conversation: how to emerge from bankruptcy.

Gerdelman is the 14-year MCI executive who was brought in on 10 days notice to salvage Metromedia Fiber Network Inc. (MFN), a New York-based company that filed for bankruptcy court protection in May.

Executives of MFN — hailed as leaders in metropolitan dark fiber during the salad days of the New Economy – have worked diligently over the last few months to cut the fat out of the bottom line, Gerdelman says.

“We are coming along,” says the chief executive, noting he will present a new reorganization plan to creditors by Nov. 22. “We have pretty good momentum in the company.”

Here is the game plan of MFN advisors: The bankruptcy court approves the new reorganization plan in late January after Girdleman presents it this month to the company’s bank, Citigroup, the board of directors and the creditors committee. In this scenario MFN could emerge from bankruptcy as early as February or March.

A primary goal is to reduce the company’s $140 million in senior secured debt, cutting it to around $70 million through an investment in exchange for equity in MFN, Gerdelman says. MFN is aiming to bring an outside investor on board to pare down the debt, though that investor is unlikely to be a telecom provider, he says. Verizon Communications Inc., the No. 1. local telephone company, invested $1.975 billion in MFN in equity and debt. Verizon technically owns a nine percent stake in MFN, but has written down its investment in the company.

Gerdelman points to the reorganization of WilTel, formally known as Williams Communications Group Inc., to illustrate the type of investor MFN may recruit. Leucadia National Corp., a New York-based holding company involved in banking and lending, invested $150 million in WilTel and purchased the claims of the telecom operator’s former energy parent, The Williams Companies, for $180 million.

While the other details of MFN’s reorganization have not been disclosed, it is likely to resemble many other bankruptcy cases over the last year: Bondholders agree to forgive debt for a hefty stake in the new company. MFN listed $4.25 billion in debt and $7.02 billion in assets in its May bankruptcy filing.

In its September monthly operating report — the latest report filed with the bankruptcy court – MFN posted $23.5 million in revenue with an $8.97 million loss from operations. MFN attributed $2.34 million in expenses to reorganization charges that are paid out to lawyers, advisors and others involved in the bankruptcy process.

“I am very comfortable right now with our expenses,” says Gerdelman, noting that on the revenue side customers want to wait to see what happens with MFN before booking more orders. “I know where every dollar goes.”

MFN had $53 million in cash as of late October.

The company is generating per month about $8 million through fiber sales, $8 million through its data center operations, $2 million through managed services and $2 million through PAIX, its independent Internet peering exchange that is up for sale, Gerdelman says.

MFN has laid fiber in more than 40 U.S. metropolitan markets, but the company is actively selling in only 12 cities. MFN’s chief says the company needs to sell in 15 to 20 cities, where 80 percent of the communications traffic is routed.

MFN also is dabbling in the wavelength business, i.e., selling lit capacity to service providers. The company is offering a wave channel product in New York City to gauge demand and determine what customers are willing to pay, says Gerdelman.

But the main theme on the CEO’s mind these days is not wavelengths. It’s a quick exit from that ignominious 10-letter word: bankruptcy.