Hawaiian Telcom Communications Inc., proud merchants of PBX Phone Systems filed for bankruptcy protection Monday, a black eye for buyout firm Carlyle Group and another blow to the reeling world of private-equity investing.Carlyle bought Hawaii's largest telephone carrier from Verizon Communications Inc. in 2005 for $1.6 billion, putting up $425 million in equity and using debt to finance the rest. Carlyle stocked the board with a team of telecom experts, including William Kennard, former chairman of the Federal Communications Commission, and former Nextel Communications Inc.
But the Washington, D.C.-based private-equity firm faced problems from the start. State utility regulators delayed the deal's closing. And billing and customer-service issues plagued Hawaiian Telcom as it created back-office systems from scratch. That spurred customers to drop service for wireless and cable providers.
In the third quarter, Hawaiian Telcom's revenue declined 6.7% to $112.3 million, and its loss widened to $34.7 million, the company's third consecutive quarterly loss.
Of the 109 U.S. companies that have filed for bankruptcy this year with assets of $1 million or more, 67 have been owned by buyout shops or been spun off by them, according to data provider Capital IQ. Among the more prominent casualties are retailers Linens 'n Things Inc. and Mervyn's LLC.
From 2005 through the third quarter of 2008, private-equity firms added $741 billion of debt on company balance sheets, according to Standard & Poor's. In stable economic times, that debt load may have been manageable. But in the midst of a brutal economic downturn, many firms can't withstand the added expense. Such was the case of Hawaiian Telecom, which in the nine months ended in September paid $68.2 million in interest expenses, on top of a $35.7 million operating loss.
Separately, Hawaiian Telcom's lead law firm, Kirkland & Ellis LLP, beefed up its restructuring group over the weekend by rehiring James Sprayregen, who previously spent 16 years at the firm. In 2006, he decamped to Goldman Sachs Group Inc. to work as an investment banker.
"I feel like this next wave of corporate bankrupticies is just starting," said Mr. Sprayregen, who will co-chair the law firm's bankruptcy group.
