Covad Gets $150 Million Infusion From SBCCovad Gets $150 Million Infusion From SBC

Bankrupt digital subscriber line service provider Covad Communications Co. said Tuesday it will receive $150 million in relief from SBC Communications Inc. in the form of resale commitments, loans, and forgiven debts. If approved by the bankruptcy court overseeing Covad's Chapter 11 filing, the money will help Covad inch toward profitability with a cushion for any bumps along the road ahead.

The investment, which will not increase SBC's 5% equity stake in Covad, takes effect once Covad's reorganization plans are complete and it has resolved $1.4 billion in debt owed to bondholders, which is expected to occur in January. SBC's capital infusion includes:

• $75 million worth of pre-paid services SBC will resell to its customers

• A $50 million, four-year loan with deferred interest for the first two years

• An agreement that it will pay on Covad's behalf $10 million in restructuring fees associated with the elimination of a six-year, $600 million resale and marketing agreement the companies' formed last year

• The elimination of $15 million of Covad owed to SBC

Just a few months after saying Covad would need to raise as much as $700 million to reach profitability, Covad chairman Charles McMinn says that thanks to the company's restructuring efforts, the SBC deal "raises all the capital we need and removes remaining doubts about how we can get to cash-flow positive." McMinn says Covad will use the funds to cover regional startup and customer-acquisition costs until the company has amassed enough subscribers to be self-sustaining in the 50 regions in which it operates. He says Covad expects to be self-sustaining in 40 of those regions by the end of this year. The money will also be used to develop and market new products, such as premium-price higher bandwidth over long distances and managed security services, which McMinn says should be available by early next year.

Covad's ability to get funding during slow economic times is impressive, says Patrick Hurley, DSL analyst at TeleChoice. "Covad is making the right moves to stay afloat and survive," he says, adding that the company has the potential to draw other investors. Gartner analyst Kathie Hackler says it's unlikely the venture-capital community is an option for Covad, but she wouldn't be surprised to see other telcos--many of which sell Covad's DSL service--offer some capital assistance.