Walkout threat initiated payment

After the company that designed FairPoint Communications’ problem-plagued computer systems threatened to walk out in August – a move that would have crippled the bankrupt phone company, according to a court filing – Capgemini received a $30 million payment.

The special deal, detailed in bankruptcy court in New York City on Monday, makes Capgemini the only unsecured creditor thus far to get a large percentage of what it’s owed in cash.

All other unsecured creditors – which includes most vendors – would get paid in stock in the new company that emerges from Chapter 11 bankruptcy. Bondholders, who are owed more than a half-billion dollars, are working on a special deal of their own.

FairPoint has asked the court to bless the deal with Capgemini. Under Chapter 11, a bankruptcy judge gets the final say on much of FairPoint’s operations.

The payment to Capgemini, a huge technology consulting firm headquartered in New York City, was alluded to when FairPoint first filed for Chapter 11 reorganization on Oct. 26. Monday’s filing gives details for the first time.

FairPoint agreed to use Capgemini while it was in Chapter 11, with the payment presumably guaranteed by the court.

FairPoint had agreed to buy Verizon’s land lines in northern New England in 2007, and Capgemini was hired to build the necessary back office infrastructure – basically, computer systems to handle billing, orders and the myriad of other information necessary to handle 1.7 million land lines in New Hampshire, Vermont and Maine.

But Capgemini, according to other filings to the Public Utilities Commission, wanted to do more than a transition. It wanted to simplify Verizon’s complicated systems at the same time, something never attempted on such a large scale.

This delayed the transition, known as a “cutover,” from the original date of November 2008 to Jan. 31, 2009, and caused all sorts of problems.

“Following Cutover, FairPoint experienced increased processing time by customer service representatives for new orders, increased processing time for customer invoices, and an inability to execute automated collection treatment efforts,” FairPoint’s filing said.

“These issues negatively impacted customer satisfaction and resulted in large increases in customer call volumes into FairPoint’s customer-service centers. While many of these issues were anticipated, the magnitude of the difficulties experienced were beyond FairPoint’s expectations.”

FairPoint withheld $50 million in payment from Capgemini. In July, the consultant notified FairPoint that it was in breach of contract and therefore was entitled to “terminate its services” on Aug. 3.

“In the event that CapGemini terminated its services, FairPoint believed that it would incur considerable cost to replace Capgemini with an alternative service provider,” FairPoint’s filing said. “Moreover, even if such an alternative could be found, it would take approximately six months to make the transition to a new service provider,” which would “likely result in a significant disruption to its business operations.”

In an earlier motion, the bondholders said Capgemini’s payment resulted in FairPoint demanding an extra $25 million from them.

FairPoint said the bondholders’ refusal to advance the money triggered the bankruptcy filing, leaving the bondholders with more than a half-billion dollars of unsecured credit. (The bondholder motion – which, among other things, called for an investigation into the Capgemini deal – has been withdrawn as bondholders also try to work out a separate deal.)

After several months of negotiation, Capgemini and FairPoint reached a deal on Oct. 9. FairPoint would pay Capgemini $30 million – $15 million up front and $15 million at the end of the year. That will still leave nearly $20 million of debt that Capgemini would try to collect in bankruptcy court, like all the other unsecured creditors.

Capgemini in turn vowed to support the overall deal, which would give 98 percent of the new company to its secured creditors – the banks – while letting unsecured creditors scramble to get a portion of the remaining 2 percent.