Hawaiian Telcom Exits Bankruptcy With Lower Debt, Sheds Carlyle Interest

Hawaiian Telcom Communications Inc., the phone company bought by Carlyle Group in 2005, said it emerged from Chapter 11 bankruptcy and reduced its debt by more than $850 million,.

The company exited bankruptcy today with $300 million in debt, it said in a statement. The Hawaii Public Utilities Commission, the last group needed to sign off, approved the Chapter 11 reorganization plan for the Honolulu-based company on Sept. 22.

“As was our goal, we have significantly reduced our debt through the Chapter 11 process and have emerged a much stronger, more financially secure company better positioned to address the growth opportunities as the leading communications provider in the Hawaii marketplace,” Chief Executive Officer Eric Yeaman said in the statement.

The almost two-year-long process let the company restructure or shed more than $1 billion in liabilities after struggling to finance capital spending while paying down debt following its leveraged buyout by Carlyle. Hawaiian Telcom can now rely on its dominant market share in the state and on new products, including services that combine voice and data in one connection, said Brian Tanner, director of investor relations.

Residential, Business

“Not only do we provide service to residential customers here, we provide it to businesses of all sizes,” Tanner said in an interview. “We’re a wholesale provider, so every telecom or communications company that does business in Hawaii uses us in some sort of way.”

The bankruptcy was the second of two in 2008 for a business controlled by Carlyle, the Washington-based private-equity firm that bought the Hawaiian operations of U.S. phone-service company Verizon Communications Inc. in 2005 for $1.6 billion. Carlyle and a group of smaller holders, mostly Hawaiian business owners, investors and lawyers, no longer have a stake in Hawaiian Telcom, according to Tanner.

Chris Ullman, a spokesman for Carlyle, declined to comment on the bankruptcy. Carlyle is the world’s second-largest private-equity firm after Blackstone Group LP with more than $90 billion under management.

Hawaiian Telcom is the largest local phone company in Hawaii with 463,490 access lines as of March 31, according to a regulatory filing. That was down from 499,870 subscribers the year before.

Cooper’s Replacement

Yeaman has been CEO of Hawaiian Telcom since June 2008. He replaced Stephen Cooper, a restructuring specialist from the former corporate advisory firm Kroll Zolfo Cooper LLC, who served for three months.

The company filed its Chapter 11 petition on Dec. 1, 2008, listing assets of $1.35 billion and debt of $1.27 billion. It blamed the bankruptcy the economic downturn and trouble transitioning to new billing and internal computer “back office” systems once separated from Verizon.

In addition to the burden of complex billing, pricing and customer-service systems, Carlyle may have also bought the company as competition for home-phone customers was increasing, said Rory Altman, a director at consulting firm Altman Vilandrie & Co. in Boston.

‘Lights Out’

Carriers with older home-phone networks, including Verizon and AT&T Inc., the two largest U.S. phone companies, are losing fixed-line customers as more subscribers switch to mobile phones or to cable-television companies that are bundling telephone service with their TV and Internet offerings.

“A lot of people did not understand the intensity in competition from the cable companies, and that cable telephony would really change the game completely,” Altman said. “Once the cable guys launched voice, it was basically lights out.”

In the first nine months of 2008, leading up to the company’s bankruptcy filing, Hawaiian Telcom said sales dropped 7.4 percent from a year earlier as customers cut subscriptions or switched to unlimited long-distance plans.

Carlyle said it was firing 10 percent of staff at the investment firm that same week. Private-equity deals had dropped more than 70 percent during the year as the global economy slipped into a recession. Some of the firm’s cuts came from the Carlyle unit dedicated to taking U.S. companies private.

“The world was coming to an end,” said Steve Kaplan, a professor at the University of Chicago Booth School of Business. “They bought it in the period where things were beginning to be frothy, where lenders were willing to lend you money at relatively low interest rates.”

The case is Hawaiian Telcom Communications Inc., 08-02005, U.S. Bankruptcy Court, District of Hawaii (Honolulu).

To contact the reporter on this story: Amy Thomson in New York at athomson6@bloomberg.net.

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net.

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