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UPC Sounds 'Going-Concern' Alarm

United Pan-European Communications N.V. has become the latest overseas cable operator to seek agreements with its bondholders, after it revealed in a Securities and Exchange Commission filing last week that failure to restructure its debt could affect its ability to continue as a going concern.

UPC is presently trying to restructure about $6.7 billion in bond debt. According to its 10-K annual report — filed with the Securities and Exchange Commission on April 12 — the company is negotiating with creditors and could possibly convert the debt into new shares of stock.

That debt, coupled with mounting losses, prompted UPC's auditors — Arthur Andersen & Co. — to state in the 10-K that there is "substantial doubt about [UPC's] ability to continue as a going concern."

In 2001, UPC's losses more than doubled, to $4.3 billion from $1.9 billion. Fourth-quarter losses grew to $1.8 billion, from $457.5 million in the same period in 2000.

UPC also said in the filing that it restated earnings for the first three quarters of 2001 because of the "revaluation of derivative instruments."

As a result, first-quarter losses widened by $32.9 million, second-quarter losses rose by $45.4 million and the third-quarter deficit grew by $130.9 million.

UPC already has restructured about $2.6 billion in bonds held by its majority shareholder, UnitedGlobalCom Inc., the Denver-based cable operator that has most of its holdings in Europe. It also began talks with bondholders that control about $1.5 billion in February, according to the filing.


UPC said it missed interest payments on the notes, and thus entered into the restructuring agreements. If it can't reach a debt-restructuring deal, UPC said it could take other measures, including a bankruptcy filing.

According to one analyst who follows the company, the going concern letter comes as no surprise.

"Anyone who wasn't expecting this just hasn't been paying attention," said the analyst, who asked not to be named.

UPC amassed the debt as part of a buying spree that began in 1999. Since that time, the company has purchased about 20 cable networks and has spent millions of dollars to upgrade its networks for digital cable and high-speed data services.

Upgrade-related capital expenditures are expected to continue to be high. In the SEC filing, UPC said it has incurred substantial losses over the years and that it expects those losses to continue "at least through 2005."

The company that could stand to gain the most from UPC's troubles is Liberty Media Corp., which owns about 76 percent of UGC. Liberty also owns about $1.4 billion in UPC bonds, which it acquired last year for around $205 million.

Swapping that debt for additional equity could boost Liberty's ownership in UPC, and follows Liberty's strategy of expanding its European assets.

"Liberty and UGC are in a great position to get most of the equity in a coercive manner if this does go into a bankruptcy proceeding," the analyst said. "I think they are trying to avoid that, but you've got some pretty hard-nosed guys on both sides here."