A recent company announcement that it may default on its credit facility prompted Arch Wireless' debt to take a 20 point drop last week and finally land in the mid-20s, dealers reported. There was a small trade on Tuesday at 26, and dealers said roughly $10 million total has traded. Buyers and sellers could not be ascertained, but one dealer said levels have dropped so quickly because "there are no buyers." Levels were in the 50 range just two weeks ago. "It's getting crushed like a grape," a trader marveled. Another market watcher called the plummet "really ugly." When asked why Arch's debt has traded down so quickly, he replied, "How many people do you see using pagers?" The company has a $600 million deal led by Bank of New York, Barclays Capital, Royal Bank of Canada and TD Securities that breaks down into three tranches. Pricing is LIBOR plus 3 1/2 %. Officials at all banks either declined comment or did not return calls. Calls to Roy Pottle, cfo at Arch, were not returned by press time.
Mike Tsao, analyst at Standard & Poor's who covers Arch Wireless, says the company has too much debt and too little revenue. "Their two-way business model isn't working out; it's not growing fast enough to offset one-way paging," he said. The company considered filing for prepackage bankruptcy, but that plan also fell through. "With the business model deteriorating and with the rework plan not working, the question is, what's next? Will it be Chapter 11? I don't know," Tsao said. "Bonds are trading based on that. The root of the problem is the leverage; they carry too much debt." Yet Tsao believes there continues to be a market for paging, adding that prices are coming down. "Arch Wireless' business model is predicated on two-way instant messaging, but their revenues come from one-way paging," he noted.
Early last week Arch Wireless announced the withdrawal of its proposal to restructure its outstanding debt and improve its liquidity through an exchange offer with the holders of senior notes issued by Arch and its subsidiary. The company also is expecting to be in default under its senior secured credit facility and under some series of its senior notes no later than Aug. 1 due to nonpayment of approximately $8.3 million of interest on July 2. The lenders under the credit facility have notified Arch that they believe the company is already in default for that reason. Arch cited lower than expected operating results during the quarter ended June 30 as the reason for the withdrawal of the proposal. The company said unexpected customer losses and bad debt expense associated with the Paging Network, which Arch acquired in November 2000, was the primary reason for the lower than expected operating results. A little more than a year ago, the sector was thriving and credit levels were 95 1/2 and climbing (LMW, 2/14/00).