Ionica has told its bankers that it will be unlikely to meet the challenging obligations in a pounds 300m loan agreement signed in June, a month before the group's pounds 640m flotation.
To meet the covenants, Ionica must have 195,000 residential phone customers by the end of next year and be able to offer a service to 3.8 million homes. It currently has just 31,000 subscribers and covers 1.65 million households.
The agreement also stipulates that the company must achieve minimum revenues of pounds 19.2m between October and December 1998. The group has pioneered technology in England and Wales which uses wireless signals from ariels on homes to by-pass British Telecom's residential network.
Sources close to the discussions said though Ionica would not need the funds until next year, it was "unlikely" to meet the obligations. Talks to renogiate the loans are expected to begin next Spring, when the company is clearer about whether it can solve a series of technological problems, though the banks are likely to impose even more onerous conditions on the loans. A spokesman said the company talked to its banks "all the time" and its business case was unaltered.
These setbacks have spawned a City nightmare as the shares, floated in July at 390p and which briefly touched 399p, crashed over the past few weeks to little more than pounds 1, wiping almost pounds 500m from the company's market value. Yesterday they fell another 5p to 102.5p, after one investor sold 660,000 shares at just 95p.
Nigel Playford, Ionica's energetic but embattled chief executive and founder, has embarked on a City offensive to the nerves of investors and analysts. But its shareholders, who include the Boots chairman Lord Blyth and a phalanx of big companies led by Yorkshire Electric, must be wondering when the rot will stop.
Analysts also remain sceptical. Mark Lambert, from Merrill-Lynch said: "Their covenants are tied to certain operating targets which are likely to be more difficult to achieve." Mark Lambert.
He pointed to the brief trading record of a company which only began its service last year. "Investing in young companies always carried additional risks. Unfortunately in this case many of those risks have materialised."
Privately other analysts are much less complimentary. One said that Mr Playford's position at the helm should be seriously questioned, though few expect him to step down, not least of Ionica's reputation as a one- man company.
"This is a woeful tale of management inadequacy and incompetence," said another. "I don't think I have ever seen a share price drop in the way Ionica's has and you have to wonder who is going to have the courage to call the bottom of the market and start buying them again."
Mr Playford's grip on day-to-day operations has already been weakened by the appointment last month of Mike Biden, a former BT executive, to work alongside him as chief operating officer. "This is a classic move for a telecoms company in difficulties," said one analyst. "You poach someone from BT who should know how to run things. Whether it will work out that way is another matter."
But the small print in Ionica's flotation prospectus points to another reason to retain Mr Playford, who is paid a pounds 250,000 salary. Apart from a three-year notice period if his contract is terminated, the documents show he can only be asked to resign as a director if he owns less than 5 million Ionica shares. He currently holds twice that number, giving him about 5 per cent of the company.
The crisis is a far cry from Mr Playford's exuberant mood over the summer. One morning in early June, as he sat in the boardroom of Ionica's Cambridge headquarters surrounded by piles of ring-bound documents entitled "Introduction to the London Stock Exchange," he enthused about the company's plans to take on BT in the domestic telephone market with its innovative radio- based technology.
"This business exists to keep shareholders, employees, customers and, to some extent, the Government happy. So far we are keeping them all happy simultaneously. I can't see any shareholders being interested in selling out until our dream comes true," he said.
For weeks after the float whispers in the City had suggested the opposite, with suspicions that Ionica's innovative technology had hit serious problems. But the scale of the difficulties stunned investors, as last month the company admitted to a list of technical and operational setbacks.
The base stations in some areas have already been swamped by demand, hitting capacity constriaints. Worse still, new software to boost call capacity from Nortel, one of the world's largest equipment makers and Ionica's technology partner, will not appear until next May.
On top of this analysts were stunned to hear that many of Ionica's customers who flocked to join the service had turned into credit risks. Disconnections have soared, while many prospective subscribers have been rejected because of low credit ratings.
Yesterday Ionica quietly extended its service to 191,000 homes in Sheffield and Rotherham. But it has simultaneously been forced to stop marketing to homes in parts of East Anglia, the first region to gain a service, because capacity at base stations has run out.
Back in June, it did not appear as if anything could dent Ionica's prospects. Surveying the landscape, Mr Playford said he could not spot any obvious disaster waiting to happen. "When we started in 1992 we have no technology, no money, no staff, no customers, no interconnection and no number portability. Now we can tick every one of those and if we do no more than we are doing now we will do fantastically well."
He also made the now hollow-sounding pledge that Ionica would not repeat the mistakes of so many of the cable companies that had gone from shooting stars to basket cases within months of flotation. "The reason shares in the cable operators have done so badly is that they made promises they have not been able to keep," he said.