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Hawaiian Telcom

Hawaiian Telcom just lost $30.5 mil. Why are these guys smiling? They believe local leadership can save the struggling company.

(page 5 of 7)

Of course, it remains to be seen if Hawaiian Telcom has the time or the money to wait for these plans to affect its bottom line. The company’s losses for the second quarter of 2008 were $30.5 million. In fact, setting aside one-time earnings from its settlement with BearingPoint and the $435 million sale of its directory business, the company has reported operating losses in every quarter since being acquired from Verizon. Perhaps more debilitating, though, is the company’s unusually punishing debt load. When Carlyle and a group of local investors purchased the company in 2005, the deal only included $428 million in equity. That meant Hawaiian Telcom was born with a debt of more than $1 billion. This year alone, it will cost the company more than $80 million just to service that debt. This burden, as much as the company’s back-office problems, is what moved Standard and Poors to recently downgrade Hawaiian Telcom’s corporate credit rating from B- to CCC+. Hal Holden, an analyst with Barclays Capital, says, “We believe any plan will have to include a restructuring of the company’s heavy debt load,” though he notes the company has only a limited number of options, including various levels of debt restructuring, the sale of assets or an infusion of new equity—either from Carlyle or new investors.

There are signs, though, that the company has finally begun to stabilize. “Work-around costs,” for example—the one-time costs of fixing what’s wrong with the company—appear to finally be declining. Ana Goshko, an analyst at Bank of America, projects year-end cash on the order of $70 million, noting, “We believe the company has adequate cash to operate and pay its cash interest payments for at least two years, and likely longer … ” That suggests the new management has at least a little time to get its house in order. Still, Yeaman and Dods remain cautious about the short-term prospects. Yeaman says, “I’ve told the employees, ‘It’s going to get tougher before it gets better. So, when it is tougher, remember I told you.’”

The future of Hawaiian Telcom probably lies in the hands of people like Garret Yoshimi, the director of technology infrastructure for the University of Hawaii system. With 30,000 telephones, multiple dedicated lines and even its own radio microwave network, the university is almost a small carrier.  It’s also one of the phone company’s largest enterprise customers. “We actually do several things with Hawaiian Telcom,” Yoshimi says. “One is we purchase connection. Basically, we’re purchasing dial tone from them, just like you do at your home.” But, as an enterprise customer, the university’s relationship with the phone company is more complex, and Yoshimi notes that it also buys maintenance and support services, as well as cable installation, from the phone company.

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Hawaii Business,October