Otelco to file bankruptcy to reduce debt, improve capital structure

By Caroline Salls

Pittsburgh, Feb. 1 - Otelco Inc. will make a pre-packaged Chapter 11 bankruptcy filing to implement a restructuring transaction that will strengthen the company by deleveraging its balance sheet and reducing overall debt by $135 million, according to a company news release.

After consulting with advisers, Otelco said its board of directors and senior management have concluded that reducing the company's debt and improving its capital structure will be best implemented through a pre-packaged bankruptcy filing, which has the support of senior lenders.

Before making the Chapter 11 filing, Otelco said it will seek the support of holders of record on Feb. 8 of its senior subordinated notes, including notes held in the form of income deposit securities (IDSs), through a proposed plan solicitation process that will occur in February.

The company said the voting process will take about 35 days. Otelco said it intends to file its reorganization plan with the U.S. Bankruptcy Court for the District of Delaware after that.

"This filing will have no impact on our operations," chief executive officer Michael Weaver said in the release.

"We hope to be in Chapter 11 for a brief period of time. We have significant liquidity and it's business as usual for us."

Otelco said it currently has more than $32 million in cash and sufficient liquidity to complete this transaction.

In addition, Otelco said it is, and intends to remain, current with all of its vendors.

"Our proposed plan, with the extension of the existing senior credit facility, will reduce total debt, simplify our capital structure and strengthen our balance sheet," Weaver said in the release.

Restructuring terms

Otelco said it has reached an agreement with its senior lenders to amend and extend the terms of its current senior financing through April 2016.

In addition, the company's IDS units will be cancelled, and the existing senior subordinated debt will be converted into equity.

The company said the vast bulk of its subordinated debt is held in the IDS units. As a result, the IDS unitholders will continue to be significant shareholders of Otelco as they are today.

According to the release, these efforts will better position the company to compete in the 21st century telecommunications marketplace, solve the near-term maturity of its senior secured financing and significantly reduce its debt burden.

According to an 8-K filed with the Securities and Exchange Commission, the terms of the pre-packaged plan include the following:

• Roughly $162 million of outstanding principal term loan obligations will be reduced to a maximum of $142 million or a higher amount agreed to by the agent and holders of more than 50% in number and 66 2/3% in amount of the outstanding principal term loan obligations through a cash payment;

• The maturity of the outstanding principal term loan obligations will be extended to April 30, 2016;

• The holders of the outstanding principal term loan obligations will receive their share of Otelco's new class B common stock, which will represent 7.5% of the total economic and voting interests in Otelco immediately following the completion of the restructuring;

• Specified revolving loan commitments will be reinstated, with availability of up to $5 million;

• Outstanding notes, including the outstanding notes constituting part of Otelco's IDSs, will be cancelled and the holders of outstanding notes will receive their share of Otelco's new class A common stock, representing 92.5% of the total economic and voting interests in Otelco; and

• The outstanding shares of Otelco's existing common stock, all of which currently constitute part of the IDSs, will be cancelled.

Financial woes

In April 2012, Otelco announced the loss of a significant contract to provide services to Time Warner Cable (TWC).

The company said the contract expired on Dec. 31, and TWC elected to begin performing services in-house rather than renewing the contract with Otelco.

In addition to the loss of the TWC contract, recent rulings by the Federal Communications Commission will continue to negatively impact the company's revenues, according to the release.

Otelco is an Oneonta, Ala.-based traditional wireline telephone services provider.

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