Colt Telecom Group Plc began a three-day court battle on Friday to stop hedge fund Highberry Ltd forcing the pan-European carrier into administration. If Highberry is successful in persuading the High Court in London that Colt is heading for bankruptcy, it will open the way for a host of similar actions against highly indebted companies.
Colt accused Highberry, which is part of New York-based Elliott Associates, of buying 75m pounds ($118.5m) of its loan notes at a discount and seeking to make a speculative profit by forcing an unjustified transfer of value from shareholders to noteholders that a debt-for equity swap would bring.
The problem Highberry faces is convincing the court that Colt will be unable to repay loans due between 2005 and 2009. Though the market in which London, UK-based Colt operates has been hit by excessive capacity and price-cutting, predicting its state in three years time any certainty is almost impossible.
Colt said that its balance sheet at September 30 showed a strongly solvent position with net assets of 977m pounds ($1.5bn) and cash balances of 978m pounds ($1.5bn). It said it expects to generate higher net cash flows than current market expectations as a result of lower capital expenditure.
Colt expects to be cash flow positive by 2005 when Highberry believes it will run out of money. It said it believes that it will be able to obtain finance in the future on reasonable terms.