Lenders As Owners

This morning's announcement by FiberNet featured an unusual wrinkle: the metro connectivity provider's bank lenders have agreed to convert $66 million owed under the company's senior credit facility into common stock. If the transaction is completed, FiberNet's bank lenders will wind up with 60 percent of the common stock and control of the company. It's the second example in a week of a data center services company using its common stock as a tool to try and eliminate debt, rather than raise cash.

Last week, Equinix said it's negotiating a deal in which it hopes to retire most or all of its high-yield "junk" bond debt using newly-issued shares of common stock. According to management, both the company's bondholders and bank lenders support the idea.

Are these desperate moves by lenders to salvage troubled loans? Or are bankers and bondholders becoming hard-core believers in the future of telecom?

It seems to be a little of both. Lenders can still be plenty fickle, as Pinnacle Holdings found out last week when a group of lenders including Fortress Investment and Greenhill Capital withdrew a funding package that would have brought the company out of Chapter 11, citing "current market conditions" in the telecom sector.

But lenders also see opportunity in situations where a company's management is taking aggressive steps to make the business work. FiberNet has done the requisite belt-tightening, and lenders may find a comfort level in president and CEO Michael Liss' experience as a former managing director at Lazard Freres and Bear Stearns. Equinix, for its part, has worked aggressively to reduce its debt, retiring more than $93 million in bank loans and high-yield bonds in the past year.

The flip side of these recapitalizations is the amount of new shares that will be issued. FiberNet, for example, is seeking permission to authorize up to 2 billion shares of new common stock (yes, that was a "b"). The impact on existing shares is found in the boiler-plate sentence that predicts "substantial dilution" in the value of the common stock - which is a polite way of saying "your shares will be worth diddley."

Yet in a Chapter 11 filing, those same shares would be worth less than diddley. Painful as they are, these restructurings keep the door slightly ajar for remaining public investors, most of whom clung to their shares as prices plunged, and would welcome any lifeline they can find.

It's a pleasant surprise to see that such lifelines are available - and coming from bankers. In the past two years, lenders have often decided to cut their losses and settle for whatever recovery might be possible through bankruptcy or liquidation. The going concern is looking like a better bet nowadays - one more sign of the industry's efforts to find a bottom and rebuild.