Hawaiian Telcom filed for voluntary bankruptcy protection early this morning after it was unable to reach an 11th-hour deal with its creditors.

The state's largest telephone company filed for Chapter 11 reorganization in U.S. Bankruptcy Court in Delaware to shield its assets from bondholders, who could have demanded hundreds of millions of dollars from the company.

The 1,400-employee company said its day-to-day operations will not be interrupted by the filing. The local phone company has about 524,000 residential and business customers.

"Our decision to restructure through a Chapter 11 filing allows the company to reduce its level of debt and reorganize its business, so we can emerge a stronger and more financially secure company, better able to compete in the ever-changing communications industry," said company CEO Eric Yeaman.

"I strongly believe that the filing provides the right course of action to support what is in the best interests of our customers, employees, suppliers and other valued constituents."

Hawaiian Telcom has about $1 billion in debt, which includes $574.5 million in bank loans and about $500 million in bonds. The debt helped finance Washington, D.C.-based The Carlyle Group's $1.6 billion takeover of the local phone company in 2005.

Last month, the company warned customers and creditors that it might have to file for bankruptcy protection after it postponed a $26 million interest payment due to bondholders.

It instead opted for a 30-day grace period to give itself time to negotiate with creditors to restructure the debt.

Had it not filed for bankruptcy protection, bondholders could have asked for their money back because of last month's missed payment.

By reducing the debt, the company could shave off millions of dollars a year in interest payments and will provide the company's new management team breathing room to offer more competitive products.

APPROVAL NECESSARY

Any restructuring plan will require the approval of the bankruptcy court and the state Public Utilities Commission, which has regulatory oversight over the company.

State Consumer Advocate Catherine Awakuni said last night that her office is monitoring the situation and that the company has kept her informed of the events surrounding the bankruptcy filing. Last month, Gov. Linda Lingle said her administration, the state Public Utilities Commission and the consumer advocate were closely monitoring the situation.

The bankruptcy is the first by a major local utility and would be the state's largest since Hawaiian Airlines' Chapter 11 reorganization in 2003. Hawaiian Airlines at the time had more than 3,400 employees and annual sales of more than $600 million. It successfully emerged from bankruptcy in 2005.

FEWER CUSTOMERS

Founded in 1883, Hawaiian Telcom has about 1,400 workers and annual operating revenues of about $500 million.

As of Sept. 30, the company had 298,527 residential customers, down 11.8 percent from the year-earlier period.

The bankruptcy comes as Hawaiian Telcom installed a new management team earlier this year to revitalize the company, which has been losing business to wireless and other competitors. The team includes CEO Yeaman, formerly with Hawaiian Electric Co., and longtime First Hawaiian Bank CEO Walter Dods, as Hawaiian Telcom's chairman. The company also has hired Wall Street investment banking firm Lazard Freres to work with its creditors.

For Hawaiian Telcom, the debt load has been a huge problem since the 2005 takeover by Carlyle. For the first nine months this year, the company paid about $68.1 million in interest payment on the bonds and bank loans, according to company filings with the Securities and Exchange Commission.

The interest rate on the bonds by themselves range between 9.75 percent and 12.5 percent a year.

To be sure, the bankruptcy is more bad news for the company, which has lost more than $200 million since the 2005 takeover.

The local phone company also is losing customers because of the heated competition from wireless companies and other providers

When Carlyle took over the local telephone company in 2005, it had more than 645,000 access lines. Today, it has about 524,000 residential and business lines.