Several months ago, Primus Telecommunications looked set to join the many other competitive carriers in the Chapter 11 club.

Revenues were declining, EBITDA was negative and the company's per-minute yields on its long-distance traffic were shrinking. Primus' exposure to more than 10 international

NASDAQ investors wrote down the stock's value from more than $51 before the April 2000 stock crash to an all-time low of less than 30 cents. Holders of bonds and debt instruments were not too confident either, with Primus notes trading for less than 30 cents on the dollar.

THE STRATEGY

In late 2001, it looked as though Primus' cash would whittle away to zero by April 2002, forcing bankruptcy. But a radical strategy and a little luck has averted disaster for now -- and the company might endure as one of the few remaining independent telcos.

The strategy involved using some $200 million of cash raised just before the April 2000 tech wreck to buy back distressed bonds at cents on the dollar.

"We were the beneficiary of lucky timing, and we had a lot of cash," says chief financial officer Neil Hazard.

"Then in July and August, bond prices for telcos such as Global Crossing and Viatel plummeted, and we were thrown in with them. Our bonds were selling for such distressed prices that we said, 'Let's use our cash to buy back the debt.' We bought back some bonds for 13.5 cents in the dollar -- that's one year's worth of interest."

Along with debt-for-equity deals and a generous retirement of debt fromHewlett-Packard, Primus reduced its obligations from $1.3 billion to about $600 million. Not only has this cut debt servicing repayments by nearly half, but Primus now controls 51% of all its debt issues.

Primus is cagey on what this means, but it's clear that minority bondholders would have trouble forcing bankruptcy or enforcing covenants against Primus' will. A Primus spokesman says nothing of the matter but "It is a gray area."

"I wouldn't say we had a coordinated strategy [to control debt], more an opportunistic rifle-shot approach. Now we have the luxury of not needing to do something right away unlike some of our peers," says Hazard.

The company also gained some luck from a $9 million interconnect refund from Telstra late last year, as well as the move by major US and European long-distance carriers to begin raising rates.

NO SMOOTH PATH

Nevertheless, some of Primus' problems were of its own making.

Like many others, the company was caught up in Internet fever and made an expensive foray into Internet data centersin such disparate locations as Brazil and Melbourne, Australia.

The company also splashed out during the tech boom and bought ISPs in Japan, India, Australia, Germany and Brazil. Anecdotal evidence suggests that the voice-centric management didn't mesh too well with some of the new data-centric personnel.

The company also started constructing a highly ambitious OC-48 ATM network, using fiber purchased from Qwest, Global Crossing and AT&T. Unlike many of the wide-eyed and naive CLECs and data carriers, Primus executives led by CEO Paul Singh and several seasoned former MCI colleagues should have known better than to join the dot-com herd.

Primus also made things difficult by talking on one hand about exiting low-margin wholesale business and talking on the other about new wholesale voice over IP (VoIP) products without convincingly explaining a margins benefit.

"VoIP is a good alternative wholesale product for less developed countries where there are high termination prices," Hazard says. But he concedes that the company is still rolling out the service, not even using it for its own international offices.

Hazard says Primus management also realized that its cost of SG&A was way too high relative to its gross margins. Ten percent of staff were eliminated, and the company pulled back on cap ex to the extent where it spent a miserly $7 million on its network in 4Q 2001.

"We've seen the cost of transport drop as we've got out of a lot of older agreements. We've also reduced head count and focusing more on the products and services that people want now such as basic Internet access and E1s and T1s."

IS THE FUTURE SO BRIGHT?

The challenge is ahead. Primus hopes to nearly double its recurring EBITDA in the first quarter to $20 million. If it can achieve this and retire more debt, its earnings may cover interest and capex payments by year's end.

Not everyone is as confident as Hazard. In a recent debt rating report, Standard & Poor's believes Primus' 2002 EBITDA target of $75 million will be "difficult to achieve in the current economic environment."

"Primus faces the challenge of aggressively growing its business base in 2002 in the face of ongoing uncertain economic conditions and continuing to contain expense levels," says S&P analyst Catherine Consentino.

Consentino says S&P has removed Primus from its credit watch list, but also lowered its senior unsecured debt rating to CCC+ on the basis that any future financing will likely be secured and take precedence.

Hazard believes that the company can achieve its forecasts and cites lower debt payments as a reason. "Our debt is 0.6x revenue. If you look at Global Crossing, their debt is 9x revenue," he says.

Unlike many of its contemporaries, Primus may survive the year and even enter profitability without having to bring in a dilutive investor or divest any significant assets. The company still believes it can obtain additional financing. But its strategy has bought it nine more months of life than seemed to be the case in the middle of last year.

Grahame Lynch is a global telecom commentator who can be contacted at www.grahamelynch.com.

RELATED ARTICLE: Primus' roadmap for survival

* Reduce debt through equity swaps and using cash to buy on the open market for as low as 13 cents on the dollar

* Cut staffing in under-performing units such as Internet data centers to skeleton levels

* Move low-margin wholesale traffic and high-cost international terminations to a VoIP platform

* Cut capex to maintenance levels