Bondholder aims to bring down Colt

A bondholder will this week press for High Court insolvency proceedings against Colt, the telecoms operator, in an attempt to break up the company.

Highberry, a subsidiary of the New York hedge fund Elliott Associates, believes Colt won't be able to repay or refinance its £1.2bn bonds when they mature between 2005 and 2009.

Owning £75m of Colt's bonds, Highberry is aiming to protect its investment by forcing the company into administration and then pressing for a debt-for-equity swap. It is expected to petition the High Court late this week.

The assault on Colt is highly unusual. While the company isn't expected to make a profit until 2005, it has £1bn of cash on its balance sheet and no bank debt.

Recent cases where bondholders have attempted to restructure companies – such as Marconi and Telewest – have been triggered when the companies admitted that they were unable to meet their covenants.

In Highberry's case it is questioning Colt's long-term business plan and the possibility of an upturn in the telecoms market.

Highberry said that "insolvency was inevitable" and it was in bondholders' best interests "for the company to be placed into administration and for proper value to be realised from Colt's assets before it is too late".

Highberry has also claimed that Colt had overstated future profits by up to £400m-a-year, which the hedge fund has used as further evidence that the company should be put into administration. However, Colt has dismissed the action as a "self-serving attempt to force an unjustified transfer of value from shareholders to bondholders". Colt said it was "confident" it would be able to meet its bond obligations.

Colt's majority shareholder is Fidelity. In July the fund manager installed Steve Akin, who had worked for Fidelity since 1992, as chief executive.

Despite the threat of action, the City appeared relatively relaxed about Colt last week; its shares lost just 1p, closing at 31p. This gives the company a value of £467m.

Some City commentators have suggested that Colt might be able to see off possible action by offering to buy back Highberry's bonds at a premium.

However, a source close to Colt said this had been ruled out, as it could set a precedent and open the door for further bondholder action.