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.
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.
