Option Investor
Market Updates

Another Chapter

Printer friendly version

Global Crossing (NYSE:GX) announced today that it filed for Chapter 11 bankruptcy. In conjunction with the filing, the company said that it would receive a $750 million cash infusion from Hutchinson and Singapore Technologies. The bankruptcy filing was widely expected; the 52-week high in the stock is $23.75. Shares of Global Crossing last traded for 30 cents.

GX - Weekly

In late December, Global Crossing obtained a waiver from its lenders in order to circumvent possible credit violations. The company was trying to seek an equity investment instead of being forced into Chapter 11 by its creditors. As it turns out, Global Crossing got both.

The company's debt laden balance sheet and the drop-off in demand for its bandwidth resulted in devastating financial losses. In the trailing 12 months, the firm lost billions from operations.

Global Crossing's difficulties and ultimate insolvency have been discounted into the market. But the filing this morning underscores the difficulty that remains in the telecom business. It started with companies such as 360 Networks and Exodus Communications -- both now bankrupt -- and has come to Global Crossing. Where the story ends in telecom remains to be seen.

Global Crossing's primary partners include Cisco (NASDAQ:CSCO), EMC (NYSE:EMC), Juniper (NASDAQ:JNPR), Lucent (NYSE:LU), Nortel (NASDAQ:NT), and Sonus (NASDAQ:SONS).

Global Crossing was struggling so badly prior to its filing this morning that the aforementioned companies have already dealt with the implications from its insolvency. However, the loss of one more customer in an already shrinking market can't bode well for the weaker competitors in the group. Cisco appears to be crushing its weaker competitors at both ends of the spectrum, from Juniper to Nortel.

The company's chief competitors in telecom services include AT&T (NYSE:T), Sprint (NYSE:FON), WorldCom (NASDAQ:WCOM). Other competitors include Level 3 (NASDAQ:LVLT), Qwest (NYSE:Q), and Tycom, now a subsidiary of Tyco (NYSE:TYC).

The loss of one more competitor may bode well for others in the telecom services business. Indeed, both the North American Telecom Sector ($XTC) and Wireless Services ($YLS) sectors were higher this morning. But it's too early to know when demand will eventually meet supply. The market may require additional bankruptcies of the weaker links in the telecom services business before the excess supply is absorbed.

More than anything, Global Crossing's bankruptcy reinforces the difficult reading of the telecom sector, ranging from cell phones to Internet services. Easier reading exists in this market. Those stories are among my recommended reading. You can find them in the Cyclical, Financial, and Healthcare sections.

Eric Utley
Option Investor

Intraday Update Archives