Hawaiian Telcom postpones a $26 million interest payment

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By Rick Daysog

Move tantamount to default, analyst says; bond rating hits bottom

Hawaiian Telcom's financial troubles deepened yesterday as the company postponed a $26 million interest payment to bondholders and Standard & Poor's cut its rating.

The state's largest telephone company said yesterday that it "chose not to make the payments" due Sunday, opting for a 30-day grace period to give it time to restructure its debt.

The company said the move will "not impact normal business operations."

Gov. Linda Lingle said her administration, the state Public Utilities Commission and the state Consumer Advocate were closely monitoring the situation.

Standard & Poor's credit analyst Susan Madison said, "The nonpayment (of interest) is a function of the borrower being under financial stress."

Standard & Poor's lowered its rating on $500 million of Hawaiian Telcom's bonds to "D," its lowest rating. The rating agency said the nonpayment was tantamount to a default.

"We consider a default to have occurred when a payment related to an obligation is not made, even if a grace period exists ... unless we are confident that the payment will be made in full during the grace period," Madison said.

mounting troubles
The postponement of the interest payment and the subsequent downgrade is just the latest hurdle faced by the 125-year-old phone company.

Since its 2005 purchase by Washington, D.C.-based the Carlyle Group, Hawaiian Telcom has lost tens of millions of dollars and almost 100,000 telephone subscribers largely because of competition from wireless providers and Internet phone services.

When the Carlyle deal closed on March 30, 2006, Hawaiian Telcom had 400,434 residential customers. As of June 30, it had 307,394.

The company is also under investigation by the PUC for providing poor service.

Since the beginning of the year, Carlyle and the company's management have taken a number of steps to improve Hawaiian Telcom's business. The company recently named former Hawaiian Electric Co. executive Eric Yeaman as its CEO and longtime First Hawaiian Bank CEO Walter Dods as its chairman.

The company also has hired Wall Street investment banker Lazard Freres to raise new capital and reduce its debt.

In a filing with the Securities Exchange Commission yesterday, Hawaiian Telcom said it needs to restructure its debt to improve cash flow and liquidity. The company said it also is looking to raise new capital.

Hawaiian Telcom said it has $80 million in cash.

Failure to make the $26 million interest payment by the end of this month will allow major bondholders to ask for their money back.

That, in turn, could place Hawaiian Telcom's bank loans in default and allow lenders to call in more than $400 million in loans.

Steven Golden, vice president of external affairs for Hawaiian Telcom, said the company is in negotiations with its bondholder but would not characterize the status of those talks.

"The company is actively involved in discussions with its creditors, including holders of these notes, with plans to reach an agreement that ultimately supports the long-term success of the company," Hawaiian Telcom said in a news release.