FLAG Telecom Turns to Bankruptcy Court

The undersea fiber-optic cable market is in shambles.

Undersea network operator FLAG Telecom (www.flagtelecom.com) announced Friday it is filing a Chapter 11 bankruptcy petition after its Board of Directors authorized the filing by a unanimous vote.

The company’s shares lost half their value, closing Friday afternoon at 10 cents on the Nasdaq National Market (www.nasdaq.com).

Last month FLAG missed interest payments on senior notes. On Wednesday the company announced a restructuring plan that would eliminate long-term debt in exchange for new notes and equity.

The financiers were not happy with the plan and a syndicate of banks backing FLAG Atlantic Ltd. subsequently accelerated the repayment of bank debt, a person familiar with the situation said. The action resulted in a cross default on the company’s outstanding senior notes, FLAG announced.

Rather than wait for the banks to force the company into liquidation FLAG management filed the bankruptcy petition to control the carrier’s own fate, the person said.

The Bermuda-based company said it would continue to provide core backbone capacity to traditional carriers, Internet service providers and other content providers while conserving capital and reducing costs “where appropriate.”

FLAG management and advisors are in negotiations with creditors, including representatives of the FLAG Telecom Atlantic Bank Group, senior note holders, and significant trade creditors, to restructure its balance sheet.

The company stated if and when an agreement is reached it would file the reorganization plan with the court.

FLAG has retained Credit Suisse First Boston (www.csfb.com) and The Blackstone Group (www.blackston.com) as financial and strategic advisors.

Under the proposal FLAG pitched to investors the company would exchange $257 million in FLAG Atlantic Bank debt for $70 million in cash and new common equity; $430 million of 8 ¼ senior notes due in 2008 for $170 million of new senior notes; and $300 million and Euro 300 million of 11 5/8 senior notes due in 2010 for $150 million in cash, roughly $40 million of new senior notes and new common equity.

In February the carrier warned it would not have sufficient liquidity to fund operations next year. The company has crumbled under a mounting debt load and over capacity in the undersea broadband market.

Global Crossing Ltd. (www.globalcrossing.com) and 360networks (www.360.net) are among FLAG’s bankrupt peers.

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