The skittish stock market is being blamed for a health crisis in Canada’s CLEC market although insiders and analysts are still optimistic that the long term prognosis for the industry is positive. The short term panic, however, is being fueled by a recent spate of companies filing for bankruptcy or seeking protection from creditors. The latest shoe to drop came last week when Axxent Inc revealed that it could run out of cash by the end of May. Earlier this month, C1 Communications Inc announced it was seeking court protection and halting a proposed merger with Wispra Inc (NL, April 9/01). "I would clearly characterize this to the unpredictable, unbelievable quick change in the financial markets that really led to the termination of the merger," C1 president Tony Cassetta says. He stresses that no single person or entity forced the company’s hand. "There’s no one shareholder, no one lender," he asserts. "It was the collective view of everyone that at this time we were stepping into something that was far more risky than anyone could really swallow in terms of their appetite." Despite its financial troubles, C1 did manage to close a separate deal it was negotiating with another CLEC, GT Group Telecom Inc. Originally announced in October, the agreement – which finally closed on April 12 – sees C1’s Atlantic Canada fibre network, on net buildings, customers and employees become assets of Group Telecom. Threatened legal action (NL, March 26/01) was withdrawn by Group Telecom. Last October was also the time that C1 started its merger talks with Wispra. Cassetta points out that the bottom didn’t fall out of the telecom market until a few weeks later. "At that time people were mildly concerned about the economy," he says. "They were concerned about performance, especially in our industry sector. All of the shareholders and the lenders had still a fairly solid appetite to put together a business plan that was in and of itself reasonably aggressive. "As the months started to unfold, each time we watched another economic reset, we had to go back and revisit the business plan," he adds, "because either the shareholders or the lenders had to regroup given the new information that they had. So what started happening is that the business plan started getting slightly smaller." Several suitors mentioned Cassetta is busy shopping his company around in hopes of a sale. He tells Network Letter that he has had expressions of interest from 10 organizations and only one has dropped out of the running. The firm has $30 million in accounts payable. It is believed Axxent is doing the same thing as it struggles to find its financial bearings. Company spokespeople are reluctant to reveal much as the firm seeks capital. One thing Axxent has not had to do yet is lay off staff. That’s different than C1, which only has 85 people on board after dismissing 265 workers. But talk of rescue is no guarantee of resuscitation. Many would-be white knights took a look at Cannect Communications Inc before walking away as the CLEC was finally liquidated (see Newsmaker column on page 8). The number of telcos on the block means that it is a buyer’s market. Further shrinkage in the industry is anticipated. "Every CLEC that wasn’t fully funded up to 2002 is in serious difficulty right now because the markets have totally shut down in terms of providing financing to CLECs," Johanne Lemay of Lemay-Yates Associates Inc explains to Network Letter. "It’s not all their fault. It’s not the fault of the business cases they put forward." Lemay puts the meltdown in context. Telecom shares, especially those of CLECs, are in decline throughout the world. Canada has many companies that were granted CLEC status but never got to the marketplace. What we are seeing now is a slightly higher profile business case, she suggests. "For the remaining CLECs, it depends how fast the liquidity and debt market comes back for investment into telecom," she offers. "If it takes another year or two years, I think it would be quite serious. If it comes back over the next six months, then there’s probably some chance that the remaining CLECs will stay or that some of the smaller CLECs can thrive." The Montreal-based analyst expects more established telcos will snap up the assets of C1 and Axxent. Telus is busy expanding its CLEC business, although one Telus insider downplayed the idea when speaking with NL. Other competitors, such as Group Telecom or Norigen, may bid for their downed rivals’ holdings. Despite the current troubled market, both Lemay and Cassetta are optimistic about the future. "My fundamental belief is that in Canada we still have a chance to do something. Someone is really going to come out of the Canadian market and be successful here," the C1 president predicts. "At the end of the day you’ve got a couple of ILECs that are really the main competitors in that space. I think AT&T and Group Telecom, if they can get their act together, will be formidable competitors." Lemay thinks new entrants will eventually appear even as things seem to be consolidating. "I think we will have a much more sane market when we emerge from this. The industry will emerge from this and those that do stay will be much stronger," she says. "I do think once this is all over you will see new carriers set up. But they may have to look at keeping a tighter control of their costs than the first wave of CLECs."