Shortly following Winstar Communications Inc.’s announcement last Monday that it had failed to make aggregate interest payments of approximately $75 million on loans, the local multipoint distribution service carrier voluntarily filed for bankruptcy, and then in a surprise move, filed a $10 billion lawsuit against Lucent Technologies Inc. for breach of obligations under a five-year supply agreement.
The claim was filed in the U.S. Bankruptcy Court for the District of Delaware.
Winstar claims Lucent’s breach is what caused the company to seek bankruptcy protection. In addition to the $10 billion in damages, Winstar is seeking immediate injunctive relief from Lucent, including the payment of more than $90 million, which Lucent was supposed to pay to Winstar on March 30.
Lucent said the lawsuit is without merit and that Winstar really owes it money for unpaid loans. Last week Lucent formally declared Winstar in default of their agreement. Lucent had loaned Winstar more than $700 million in 1998 so Winstar could build out its network. Under terms of their agreement, Lucent was supposed to provide further financing.
When Lucent failed to pay Winstar on March 30, Winstar defaulted on several loans, including its obligations to Lucent. Essentially, Winstar needed Lucent’s money to pay back, among others, Lucent. Winstar does not see it that way, however.
In its Securities and Exchange Commission filing, Winstar alleges “Lucent represented that it had the expertise, personnel and financial wherewithal to undertake its obligations under the supply agreement … Little more than two years into the five-year agreement, Lucent has shown its promises were hollow.”
While the details of that suit, and four others filed by private law firms against Winstar on behalf of purchasers of Winstar securities, are straightened out, Winstar said it will continue to provide service to its approximately 30,000 business customers.
Winstar has arranged for debtor-in-possession financing with an initial commitment of $75 million from a consortium of banks including CIBC, Citicorp, Credit Suisse First Boston, The Bank of New York and Chase Manhattan Bank. This commitment may be increased to as much as $300 million upon the satisfaction of certain conditions.
“We expect to emerge from the Chapter 11 process with a new balance sheet that has significantly less debt, thereby dramatically lowering our interest payments and providing us with more operating flexibility,” said William J. Rouhana Jr., chairman and chief executive officer of Winstar.
The Nasdaq Stock Market halted trading on Winstar last Wednesday until the company can provide Nasdaq with further information regarding its status. Winstar’s stock last traded at 14 cents per share.
Bankruptcy Creditor’s Service Inc. also said it will begin publication of Winstar Bankruptcy News, which will track the bankruptcy progress of the company
“This won’t be a quick restructuring and what Winstar’s business will look like at the end of the Chapter 11 tunnel is unknowable at this stage,” said Peter Chapman, president of Bankruptcy Creditor’s Service.
