Telecom has limited exposure to Global Crossing fall out

Telecom won't be lining up as a creditor of failed bandwidth portal company Global Crossing, despite having transacted at least one deal through its service last year.

Telecom won't be lining up as a creditor of failed bandwidth portal company Global Crossing, despite having transacted one deal through its service in the last financial half year.

Global Crossing is currently in bankruptcy proceedings in the US, and is under investigation by the Securities and Exchange Commission (SEC) as well as the FBI for alleged irregularities in the way it accounted for the practice of companies swapping bandwidth on fibre cables.

Telecom public affairs manager Martin Freeth says Telecom did conduct one such deal through Global Crossing last year, however there are no repercussions from it.

"We have immaterial exposure to that situation," says Freeth.

Such deals, referred to in the industry as IRU or indefeasible rights to use, are quite commonplace and involve the exchange of bandwidth between carrier-class companies. However, money is often also exchanged, with usually the same amount being given and received. How this is accounted for at Global Crossing is a matter the SEC has been investigating, according to the New York Times.

"We did sell some capacity on Southern Cross and bought some capacity on the trans-Atlantic cable and both sides paid at the same time. In a sense it was [a bandwidth swap] because the deals were done back-to-back and the cheques were exchanged both ways," says Freeth.

Telecom has completed four such deals in the last financial half year, however only one of those deals was through Global Crossing.

"That's a straight out asset acquisition and the value of that asset goes onto our balance sheet and is depreciated over the life of the asset."

Some telcos have been challenged over the practice of accounting for that money - whether it is counted as revenue all in the year the deal is signed or whether it is spread out over the lifespan of the deal. Telecom adopts a conservative approach to that issue, says Freeth, and treats any capacity as an asset and any earnings from the deal as revenue, to be counted in the current year.

"In the period just gone we've disclosed the $27.9 million total gain on four such transactions in the half year. In each case that gain is the cash realised over the book values of that capacity."

Telecom, says Freeth, treats the capacity as an asset and accounts for it as such.

"It's on our balance sheet as an asset and its value is its historical cost. It's depreciated over time".

Global Crossing's problems may sound familiar to anyone following the energy company Enron's bankruptcy proceedings. Like Enron, questions are being asked about Global Crossing's involvement with accounting firm Arthur Andersen, which handled Global Crossing's books. Global Crossing hired Joseph Perrone from AA as its vice president in charge of finance, and the Singapore newspaper the Straits Times reports that Global Crossing gave business to Perrone's son's web development firm on more than one occasion.

Seattle newspaper the Seattle Post-Intelligencer reports that Global Crossing chairman Gary Winnick sold $US734 million worth of stock just prior to the bankruptcy proceedings and that Global Crossing paid millions to a privately held merchant bank founded and controlled by Winnick.

Global Crossing is the US's fourth largest bankruptcy to date.

Asian telco Hutchison Whampoa is discussing a possible bail-out of Global Crossing worth about $US750 million. Hutchison Whampoa already has a 50-50 joint venture with the Asian arm of Global Crossing. The telco has also signed an agreement with Telecom over third generation cellphone provision.

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