Genuity in legal dispute after $850 million funding request; defaults on loan due to Verizon pullout

By Sara Rosenberg

New York, July 25 - Genuity Inc. is involved in a legal dispute with one of its bank lenders after it requested that the syndicate fund the remaining $850 million of its $2 billion line of credit - a move the company made just days before Verizon announced that it was giving up its option to acquire a controlling interest in Genuity, causing a default under the company's credit facilities.

Genuity requested the additional funding on Monday and, to date, approximately $723 million has been received, with eight of the nine banks "fulfilling their obligations," according to Genuity.

But Deutsche Bank did not provide its part of the requested extra financing "and Genuity indicated that it has taken legal action to require them to satisfy their obligations," the company said in a press release.

However Deutsche disputed Genuity's position.

"We can't comment on the legal action commenced by Genuity as we have not yet been served, but any claim that we have failed to fulfill our obligations under the credit agreement is incorrect," a Deutsche spokesman said. "We have been working with Genuity to assess, and will continue to assess, our rights and obligations under the credit agreement."

The Chase Manhattan Bank, Citibank, Credit Suisse First Boston and Deutsche Bank originally led the loan, which was signed in September 2000.

In response to Verizon's action, which was taken Thursday, three days after the funding request, Genuity chairman and chief executive officer Paul R. Gudonis said in a statement: "Verizon's decision to cancel its option to integrate Genuity and its credit agreement was unexpected and a disappointment to us. Fortunately, our management and Board of Directors had made the sound business decision earlier in the week, prior to learning of Verizon's intentions, that in this turbulent economic and business environment, it was in the best interest of our customers and shareholders to increase our cash on hand."

With the $723 million, the company's cash on hand has increased to $1.3 billion.

"We are disappointed with this decision given the fact that we have consistently operated the company in the best interest of all involved, including Verizon. We have cut costs, improved efficiencies and hit our financial targets on a path to profitability. We clearly were taking the steps that Verizon had publicly indicated would lead them to re-integrating Genuity," Gudonis said. "Regardless of Verizon's position, we intend to continue to operate our business effectively and provide our customers with the high-quality services they've come to expect from us. In fact, Verizon is still one of our largest customers and we will continue to maintain our relationship with them. Verizon has indicated they intend to honor their $500 million 'take or pay' commitment for the purchase of Genuity's services. They will also continue to resell Genuity's enterprise IP networking services.

"We believe we have a valuable set of assets in our Tier 1 network, our hosting data centers, and, most of all, our highly skilled employees. Now that Verizon has elected not to reintegrate Genuity, we will evaluate all of our options, which could include seeking another strategic partner or restructuring our operating plan while we address this situation," Gudonis added.

According to a Verizon release, the decision to not reintegrate Genuity "was based on a variety of factors, including market conditions and Verizon's business needs."

Genuity is a Woburn, Mass. internet protocol networking services provider.

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