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Bank Presses Galaxy as Sale Efforts Stall

Galaxy Telecom LLC's lenders are apparently losing patience with the MSO's efforts to sell off assets, and are taking steps that could force the company to come up with a $120 million bond payment.

In a Securities and Exchange Commission filing last week, Galaxy said it had received notice that Fleet National Bank would suspend principal and interest payments on $120 million of Galaxy's 12.38 percent senior notes for 179 days. Analysts said Fleet makes payments to the bondholders based on money received from Galaxy.

The document said Fleet was taking this action because Galaxy violated an earlier agreement to find a buyer for its cable operations by July 31.

According to some observers, the filing means Galaxy most likely missed an interest payment due Oct. 1-for 12.38 percent of the $120 million, or about $1.5 million. In most bond offerings, companies are required to make interest payments to bondholders every six months-in Galaxy's case, on April 1 and Oct. 1.

When the company does not make that payment, it could trigger a default event in which the bank that handles the payments can ask for the full amount of the bond offering-$120 million.

Though Fleet still has the option to do that, the SEC filing shows that the bank has given Galaxy up to 179 days to come up with the money.

That may be difficult. Galaxy's debt is already rated CCC-minus by Standard & Poor's Ratings Services, and was placed on "CreditWatch" in August, which means the bonds are vulnerable to default.

Galaxy has also been trying to sell off its cable systems since the beginning of the year, so far to no avail.

The MSO's owners-including three venture-capital backers, Spectrum Equity Associates, T.A. Associates and Fleet Equity-tried to swing deals to sell the 123,000-subscriber cable operation earlier this year to Adelphia Communications Corp. But that deal fell through, according to sources.

Another letter of intent, with Classic Communications Inc., expired in February, according to earlier Galaxy securities filings. A third potential sale, to Mallard Cablevision LLC, is still pending.

Galaxy executives did not return calls last week seeking comment.

UBS Warburg LLC executive director and senior telecommunications and cable television analyst Aryeh Bourkoff said the latest Galaxy filing "means the banks have definitely exhausted their tolerance of management's inability to sell the company. They have forced the company into a potential event of default."

According to Bourkoff, that could eventually lead to a Galaxy bankruptcy filing, given the company's financial straits.

Galaxy's most recent financial statement said that revenues declined 4.5 percent in the first half (June 30), to $27.8 million from $29.1 million. Net losses increased almost six-fold, to $7.7 million from $1.3 million a year ago.

Mallard, a Houston-based operator, signed a letter of intent to buy Galaxy in June. President William Jenkins said Mallard is still actively looking at the Galaxy systems, although a letter of intent to buy the systems expired June 30.

Jenkins said he was not aware of the latest SEC filing, but expected the Gleason family to find another solution to their problems short of default. That could force the operation to seek protection from creditors under bankruptcy law.

"Those are smart guys," Jenkins said. "I'm sure they have some kind of plan to rectify this."

Galaxy was founded in 1979 by Tommy Gleason Sr., a 30-year cable veteran who built his first system in York, Neb., in 1962. In 1980, son Tom Gleason Jr. joined the company as president and chief operating officer. He became chairman in 1995, after his father retired.

Tom Gleason Jr.'s son, James Gleason, became president and COO in 1994.

Galaxy, based in Sikeston, Mo., has about 500 systems in 13 states, including Kansas and Nebraska, with an emphasis on small towns and rural areas.

Its 500 systems, in the Midwest and Southeast, have some value, but require substantial upgrades.

Bourkoff said most of the systems are at 330- to 400-megahertz capacity. An upgrade to a more respectable 550 MHz would cost another incremental $500 per subscriber, the analyst figured.

Galaxy has said it is in the midst of a $20 million rebuild, which it hoped to complete in about three years. For that reason, the company was expected to fetch a price of $2,000 per subscriber or less, well below the industry average of between $4,500 and $5,000 per customer.

Bourkoff said he valued Galaxy overall at about $1,200 per subscriber, or about $147 million in all. But he said the systems could go for more or less, depending on the markets.

System upgrades were only one factor in Galaxy's difficulty finding a buyer, Bourkoff said.

"Clearly there are some systems that are probably not worth upgrading at all, given the quality of the markets and the potential take rates for new services," Bourkoff said. "The ability to finance transactions in the public market this year is much worse than it was in the last two years.

"The [shrinking] number of buyers, and the financing opportunities, have hurt Galaxy as well."