Another Sprint Affiliate Succumbs

Chris Nolter

07/21/2003

The Chapter 11 filing in Ohio late last week by Horizon PCS Inc. further thickens the miasma of financial distress engulfing Sprint Corp.'s wireless affiliates.

The Chillicothe, Ohio, company is one of the largest affiliates, with the right to market Sprint's wireless services in portions of 12 states from the Midwest to East Coast with a population of more than 10.2 million. The company posted operating revenues of $63 million in the second quarter, with a net loss of $107 million.

The bankruptcy filing was hardly a surprise. Horizon said in May that it did not have sufficient money to pay its loans and fund operations. The company warned that a bankruptcy filing was a possibility and said it had hired Berenson & Co. LLC as an adviser in the restructuring.

The company's counsel is Shalom Kohn of Sidley Austin Brown & Wood LLP and Jack Pigman of Porter Wright Morris & Arthur LLP.

Horizon fell out of compliance with its bank and loan covenants on June 30. As per their loan agreement with the company, the company's senior credit facility lenders accelerated the amount due.

The company does not plan to seek debtor-in-possession financing.

In its financial report for the second quarter, released alongside the bankruptcy filing, Horizon said it had total assets of $303 million, including $46 million in nonrestricted cash and equivalents.

The face value of Horizon's long-term debt totals $625 million. That includes $295 million in discount notes, $175 million in senior notes, a $105 million secured credit facility and another $50 million secured facility.

The company also said it owes Sprint $14 million, on top of accounts payable of nearly $17 million.

Horizon is the second Sprint affiliate to seek bankruptcy protection this year, following iPCS Inc., which filed in February.

Many of the other eight affiliates are in some sort of financial distress, though most are not bankruptcy candidates.

The affiliates together spent about $3 billion to build out their networks, primarily in lower-volume rural areas. Collectively, they hold an estimated $2.5 billion in debt.

Sprint owns the spectrum licenses and provides some services, like billing and customer service.

"Horizon's financial problems, like iPCS', are due to debt load and they alone are responsible for their financial condition," said Sprint PCS spokesman Dan Wilinsky, who would not comment on any negotiations with the companies.

Horizon's financial reports show that the company has been trying to negotiate fees and other matters with Sprint since the first quarter. In late July, the company cited fruitless talks when it announced a round of layoffs and sales and service centers closings.

The company's chairman and CEO, William McKell, said the bankruptcy would help Horizon to negotiate with Sprint "to develop equitable and appropriate solutions that will allow our company to continue to operate."

Two of the troubled affiliates have filed lawsuits against Sprint, though a Horizon representative would not discuss the company's intentions in that area.

"We continue to watch with interest the developments in the actions taken by the other affiliates," a company spokeswoman said, declining to comment on the possibility that Horizon might pursue legal action.

US Unwired Inc. filed suit in the U.S. District Court for the Western District of Louisiana in July. The company charged Sprint with violations of the Racketeer Influenced and Corrupt Organizations Act, breach of fiduciary duty and fraud. US Unwired claims that Sprint acted unlawfully in its attempts to change its affiliate agreement, among other allegations.

The Lake Charles, La.-based affiliate is seeking treble damages, though no dollar figure is specified.

US Unwired had previously said that its subsidiary, IWO Holdings Inc., would not have sufficient liquidity through 2003. The parent said it had been in talks with IWO's banks and noteholders to restructure the debt, and that all of the parties had retained advisors.

The other bankrupt affiliate, iPCS, is a unit of Atlanta-based Airgate PCS. It filed suit against Sprint when it sought bankruptcy protection in February. The company charged that Sprint had caused the bankruptcy through a breach of contract and is seeking a buyout in accordance with provisions in the affiliate agreement. Filings by Sprint have denied the charges.

Subsequently, a unit of Toronto Dominion, the administrative agent on iPCS' bank loan, filed suit in Georgia state court earlier this year seeking remittance of funds Sprint collected. The bank's counsel is Paul, Hastings, Janofsky & Walker LLP.

Under the agreement, Sprint collects the revenues for the affiliate and keeps 8% of the funds. If the affiliate's debts are accelerated, as iPCS' were in February, the lenders can demand 4% of the revenues.

Sprint is attempting to have the case moved to the bankruptcy court.

Meanwhile, iPCS' creditors committee has announced its intention to sue Sprint, arguing that because its control of iPCS prevented it from repaying creditors, Sprint should have to assume the affiliate's obligations. A hearing to decide whether the unsecureds could pursue litigation was held in July, but Judge Homer Drake has not ruled.

Paul, Weiss, Rifkind, Wharton & Garrison LLP and Chanin Capital Partners represent iPCS' creditors committee and a group of IWO creditors.

King & Spalding LLP is Sprint's law firm in the iPCS matters.