Covad Plans Bankruptcy, Stock Swap

Covad Communications Group Inc., the nation's biggest independent digital subscriber line (DSL) provider, said Tuesday that it's in negotiations with its bondholders to eliminate $1.4 billion worth of debt through a bankruptcy filing and stock swap.

Under the proposal, Covad would file in mid-August for reorganization under Chapter 11 of the U.S. bankruptcy code. Covad's operating companies, which supply service to customers, are not expected to be included in the proceedings, and the company says they should be able to operate without interruption. Bondholders would receive 19 cents on the dollar and shares of preferred stock in exchange for their high-yield and convertible bonds, and Covad would return $26.5 million in cash to the holders of its 12.5% bonds. The company says that bondholders representing a majority of its outstanding debt have agreed to the terms of the deal.

The Santa Clara, Calif., company is a former Silicon Valley darling that's been struggling to stay afloat this year, wracked by a massive debt burden, weakness in the DSL market, and tough competition from the Bell companies, or incumbent local exchange carriers. "The competition from the incumbent providers became more real and more serious more quickly than anyone expected," TeleChoice analyst Pat Hurley says.

A number of other competitive local exchange carriers have already filed for bankruptcy this year: Teligent in May, Winstar Communications in April, and Rhythms NetConnections, one of Covad's main rivals, just last Wednesday. In March, NorthPoint Communications, Covad's biggest DSL competitor, shut its doors and sold its assets.

But Hurley says there's hope for Covad if it can focus on underserved markets such as small to medium-sized businesses. "If they can pull off this financial restructuring and keep their partners and get some value-added services and really differentiate themselves, they're not dead yet."