Global Crossing Ltd.
GX Financial Analysis

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By rfnf2933
September 5, 2001

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GX Fans, I am a LONG time lurker on the SI and RB boards, and have started to read MF more frequently. I am a long time holder of GX and very excited about their prospects. My background is a public CPA who is currently the CFO of a medium sized private company.

I have spent some time the last couple of days looking into more of the details concerning GX's financial strength and liquidity. For the most part, I have used the December 31, 2000 Form 10-K. This of course represents the most recent year end financial information. I have also spent some time reading and analyzing the June 30, 2001 Form 10-Q which has some good information, although not as detailed as the Form 10-K.

I will provide some of my thoughts and conclusions shortly, but just to quickly summarize for those who might not want to read the entire post, I really don't see much of a financial liquidity issue. Sure, it would be nice if they were free cash flow positive TODAY, and it would be nice if they didn't have $6 billion in debt before the preferred shares, and it would be nice if the economy wasn't a concern. Still, given all that, in looking at the detailed numbers and cash flows, I really don't see much of a problem.

As I start to list out my perception of the facts and reach my various conclusions, I would love to have some CONSTRUCTIVE criticism and questions. We are smarter as a group than as individuals.

Financial Summary

At 12/31/00, GX had approximately $6.3 billion of outstanding Senior Debt and about $3.2 billion of outstanding Preferred Shares. (I am ignoring the short term $1 billion outstanding as that has been paid off with the Citizen's proceeds.) This situation is little changed as of June 30, 2001. This is a large chunk of change, don't get me wrong.

However, the really good news about the Senior Debt is virtually none is due for at least several years. Only a couple hundred million IN TOTAL is due from 2001 thru 2003. Not until 2004 does a decent size chunk come due ($1.6 billion). Only $400 hundred million is due in 2005 and then the rest is due after 2005, up thru 2009. So what does this mean? Well, it means that given all the whaling and crying and gnashing of teeth by the analysts in recent months about GX's impending bankruptcy, it seems that basically ALL THEY HAVE TO PAY from a fixed debt perspective is literally a few hundred million over the next couple years. That is really chump change for GX, and I can't really see any scenario where they would struggle to meet those obligations. Of course they still need to continue to pay their interest annually, and that will likely be in the $500 million to $700 million range annually being conservative. Still, the sum of those two amounts over the next three years simply do not represent a significant liquidity issue. In my financial opinion, it is barely a bump in the road given the size of GX.

On the Preferred Share side, the story is quite similar. GX will have to pay dividends each year in the range of about $200 million to $300 million (and they have the option to pay some of those dividends in additional preferred shares and not cash, if they are cash tight.) The principal obligations aren't required to be paid off for many years, as early as 2004 at the company's option or as long as 2008 or 2009 in some circumstances. Again, this financial structure gives GX a tremendous amount of latitude.

As many of you know, GX is not forecasting to be "free cash flow positive" until the end of 2002 (I think this is correct, if not, someone advise.) My understanding of "free cash flow positive" is that GX will be able to fund all obligations, disbursements, outflows, etc. without having to borrow anything. Right now, they are operationally cash flow positive, and have been for each of the years ending 1998, 1999 and 2000, and were operationally cash flow positive for the six months ended June 2001. That is a very important point to understand.

Operationally, they are cash flow positive. Many companies at this stage are far from operationally cash flow positive. They are not yet "free cash flow positive" because they are borrowing lots of money to fund their network. But as we all know, that network is now complete, so their capital expenditures are projected to drop substantially in 2002 and beyond. At the beginning of 2001, GX was projecting capex at $5 billion. In the 2Q conference call, GX was projecting capex at less than $4.5 billion. The primary reason for the drop was due to the on or below budget completion of their network and the favorable pricing they have been receiving in this slowing market. Some predict that actual capex for 2001 will be quite close to $4 billion, for a whopping $1 billion savings from just 12 months earlier. (Remember, that $1 billion just from 2001 capex savings would be enough to pay ALL interest, ALL Senior Debt obligations, and ALL Preferred Share dividends for 2002. So right there, 2002 is covered with previously expected 2001 disbursements. I think that is very impressive.)

GX has not yet commented on 2002 capex yet, although expectations are that it will be significantly reduced from 2000 and 2001 activity. Some estimates I have seen are in the $2 billion to $2.5 billion range. I am not sure what the exact number will be. But what I am very confident of is the fact that since the network has been fully complete, these expenditures will be very flexible. It's one thing when you have to buy the pipe to lay the last 10% of the network. That must be done and the expenditure really can't be debated. It's quite another to have to decide if we should spend $300 million in this new market or $200 million in that new market, or should we take advantage of some great pricing, etc. etc. etc. These expenditures are debatable, and if GX is in a cash crunch, it would be quite easy to simply defer these expenditures until cash flows improve. That is why I really foresee little problem for GX's liquidity for the next couple years.

Not only do they NOT have a lot of fixed payments required until 2004, they also have a lot of flexibility in deferring cash outflows if needed. My company is going thru the very same concept. We are experiencing some slowness with the economy, so we are planning on reducing our projected capex expenditures by 30% or so in 2002 to free up extra cash. This isn't going to hurt us in the short run, and we will make it up where needed in the long run. GX can and will do the same thing.

Conclusions/Other Thoughts

I am going to wrap this up with some conclusions and other comments, and then hopefully we will get some good discussions on the agreements and disagreements with this analysis.

1) I really don't believe GX has much to worry about in the next couple years related to liquidity. The economy does concern me, but I am confident that over the next 6 to 18 months things will improve considerably. I don't foresee any reason why GX can't patiently wait out that timeframe.
2) GX's current debt structure offers them tremendous flexibility, in that most of the debt isn't due for quite some time. They have plenty of time to get their system fully cranking and to wait out any economic issues. The industry GX servers certainly isn't going away (and continues to grow quickly), and neither is GX.
3) 2001 YTD is better than 2000 YTD. Their balance sheet has improved (primarily the current ratio) and cash flows from operations have improved. Revenues and adjusted EBITDA has improved. Things are getting better. It is true that GX tried to temper expectations a little for the balance of the year, but they are still projecting solid improvement over 2000. My analysis is primarily based on year end 2000 activity, and the improving 2001 results YTD versus 2000 only make the picture more clearer.
4) The Citizen's sale was much better than expected. Their net proceeds after taxes and the paydown of the short term debt was much better than expected, by hundreds of millions of dollars if my memory serves. That has only helped their liquidity.
5) Their 2001 capex has dropped significantly from previous expectations, which will be a HUGE help in 2002 and 2003 liquidity. Remember that GX has projected cash and available liquidity in the $1.7 to $2.0 billion at year end 2001. That is a lot of money, and should easily carry them thru 2002 even before the SIGNIFICANT reduction in 2002 capex versus 2001 and 2000.
6) GX also factored (sold) some receivables in June 2001 which freed up some extra cash.

I haven't even begun to talk about the exciting promise of GX's business plan. If they even come close to executing their business plan as they predict, any liquidity concerns will be long gone, and GX longs will be very, very happy. The potential of their business plan is another very exciting piece of the GX puzzle. However, I am even more convinced than ever before that GX does not have a liquidity issue. These prices today are tremendous long term buying opportunities. For those of us who haven't been buying, we will regret it in a few years.

Comments encouraged. Let's debate the issues rationally to get to the right answer.


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