FairPoint Announces Chapter 11 – Wall Street v Main Street?

FairPoint has Reached an Agreement with its Bank Lenders that will Restructure its Costs and Balance Sheet

As a leading provider of a full range of communications services, FairPoint Communications provides local and long distance voice, data service, Internet, television and broadband services. FairPoint operates 32 local exchange companies in 18 states with 1.7 million access lines. Like many companies, FairPoint has been impacted by the recent turmoil in the financial markets. As we have shared with many of our stakeholders, we have been working with our bank lenders to reduce our debt. We are pleased to announce FairPoint has succeeded in reaching a pre-arranged deal with our bank lenders that will reduce our debt in excess of $1.7 billion. We have entered Chapter 11 to implement this deal and restructure our costs and balance sheet. This is good news and we are confident that FairPoint will emerge as a much healthier and more viable company structured for future growth and profitability.  

To read the FairPoint’s entire announcement, click http://www.fprestructuring.com/.

The International Brotherhood of Electrical Workers (IBEW) and Communication Workers of America (CWA) announced Friday that FairPoint was on the brink of bankruptcy.  

As the unions have consistently maintained, FairPoint’s problems were caused primarily by its crushing debt and an organizational chaos that adversely affected revenues and operations.  Despite waging an all out campaign to oppose the sale, thousands of former Verizon workers have spent the last year-and-a-half working to make their new company succeed.

According to the Maine Public Broadcasting Network:  

South Carolina-based FairPoint has been struggling since its $2.3 billion acquisition last year of Verizon Communications’ landlines in Maine, New Hampshire and Vermont. Thousands of customers in all three states have lodged complaints about billing and service problems, and regulators in Vermont are considering pulling FairPoint’s license to operate in that state.

FairPoint says the Chapter 11 filing, which must still be approved by a court, will reduce its annual interest costs from $200 million to $65 million. The company says it’s current debt is now $2.7 billion, and the agreement will reduce it to $1 billion.

The CWA and IBEW, which represented 2,800 workers employed by Verizon in Maine, New Hampshire and Vermont, submitted lengthy legal briefs to State Regulators in opposition to the FairPoint sale.

Based on what we know at this point in time, the proposed sale of Verizon’s properties in these states to FairPoint poses significant risks not only to our jobs and livelihoods but also to the economic health of our communities, both in terms of the quality of telephone services and the availability of truly high speed internet.

One of the key issues of the CWA and IBEW argument was that of a legal loophole called a Reverse Morris Trust, which CWA and IBEW claimed was being “used by Verizon to abandon its

customers and avoid taxes.”

The “Reverse Morris Trust” is a tax-avoidance technique that, thanks to Wall

Street’s financial wizards, is increasingly deployed by corporations seeking to sell off

unwanted assets without paying taxes on their gains.  It is a remnant of the once-

booming “disguised sale” transaction structure that many thought Congress had

largely eliminated in the Taxpayer Relief Act of 1997.

Under a Reverse Morris Trust, a parent corporation can spin-off a subsidiary into an

unrelated company, tax free, if the shareholders of the parent end up controlling

more than 50% of the voting rights and economic value of the resulting merged

company.  As graphically described below, the basic elements of this process are:  

Corporation D spins off subsidiary Corporation C, which then merges into

Corporation A (an unrelated company); to qualify for tax-free treatment, Corporation

D’s shareholders (and thus Corporation C’s as well) must own a controlling interest

in the post-transaction Corporation A.

Typically, the parent loads up its “Spinco” with as much debt as it can support, while

causing this subsidiary to “dividend-out” or otherwise pay the proceeds of the new debt to

the parent or one of its affiliates immediately prior to the spin-off and merger.

Reverse Morris Trust,corporate tax loophole,FairPoint,Enexus

10 thoughts on “FairPoint Announces Chapter 11 – Wall Street v Main Street?

  1. The regulatory agencies should have spiked this deal when the bait-and-switch financing plan (changing the bond interest rate from 8.125 to 13.125%) was revealed at the last minute.  Instead, they rolled over and rushed to approve the sale.

    We all know the Vermont DPS (under OBrien) was a cheerleader rather than an advocate for customers.  I dont’ expect that to change.

  2. Oh, wait, um, NOT.

    At the state level, opponents to the acquisition expressed concern that FairPoint can’t afford to spend the more than $2 billion for Verizon’s lines, but the commission said, “We reject the commenters’ claims that FairPoint lacks the financial qualifications to handle acquiring Verizon’s operations in Maine, New Hampshire, and Vermont. While FairPoint would assume a higher level of debt than either of the companies absent the merger, FairPoint represents that it will have adequate cash flows to support its investment plans and service debt…Moreover, FairPoint states that it intends to spend more per line than Verizon has in recent years. Specifically, FairPoint represents that it anticipates making a capital expenditure of at least $100 per access line per year in the three states for the five years following the merger closing date…While it is difficult to calculate the exact amount per access line that will be required to maintain and improve service quality and broadband availability, we take comfort in FairPoint’s representation that this level of investment will serve as a significant step in reaching those goals.”

    Surely, no one could have anticipated that Fairpoint would go bankrupt in the near term as a result of incurring massive debts.

  3. I hope that BT manages to climb out of its current hole and can become an entity to, at some point, replace comcast or fairpoint as Vermont’s communications provider.  

  4. For a job well done?

    Two FairPoint executives received more than $100,00 in performance bonuses it was announced in May .

    The two top executives at troubled FairPoint Communications customers received performance-based bonuses recently at roughly the same time that the company was being lambasted over its poorly-executed system cutover in New England.

    FairPoint Chairman and CEO Gene Johnson received an $83,862 bonus and a 30 percent raise in 2008, according to an SEC filing, while FairPoint President Peter Nixon accepted a $50,000 bonus. Other executives also were reported to have received raises.

    The bonuses appeared to be directly connected to the acquisition itself, and Johnson reportedly made less in compensation for 2008 than he did in 2007.

    Read more: http://www.fiercetelecom.com/s

  5. I’m referring to “Under a Reverse Morris Trust, a parent corporation can spin-off a subsidiary into an

    unrelated company, tax free, if the shareholders of the parent end up controlling

    more than 50% of the voting rights and economic value of the resulting merged

    company.”

    And in other news:


    A small telecommunications company buys rural landlines from Verizon. Its computer systems fail, causing major headaches for customers, many of whom switch carriers. The company charges toward bankruptcy.

    . . .

    Hawaiian Telcom, a subsidiary of the global investment firm The Carlyle Group, bought more than 500,000 lines in 2005. The group filed for Chapter 11 bankruptcy in a Delaware court Dec. 1. Its creditors are set to vote on a reorganization plan by theof the month.

    (In Hawaii, echoes of FairPoint ; Company bought Verizon lines, faltered, AllBusiness.com, 10/20/09)

    Seems the same routine is getting ready to play out in West Virginia now.

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