Hawaiian Telcom Inc. could emerge from bankruptcy protection by the end of the year under a restructuring plan proposed by the local phone company.

In a filing in U.S. Bankruptcy Court yesterday, Hawaiian Telcom said it plans to convert more than $1.1 billion in debt to equity, in a move to cut the company's borrowings by $790 million.

The deal, valued at $460 million, also wipes out all but a small portion of The Carlyle Group's interest in the local phone company. Carlyle, a Washington, D.C.-based investment firm, purchased Hawaiian Telcom in 2005 for $1.6 billion.

"The filing of the plan and disclosure statement is an important achievement in our restructuring efforts," said Eric Yeaman, Hawaiian Telcom's president and chief executive officer.

"The plan provides for a significantly deleveraged capital structure, and the terms of the new debt give us greater financial flexibility to execute our business plan and invest in new products, better positioning the company for future success."

The company said its plan has the support of the committee representing the company's secured lenders, A hearing on Hawaiian Telcom's disclosure statement has been set for July 23.

If the disclosure statement is approved by the bankruptcy court, the plan will be put to a vote by Hawaiian Telcom's lenders and other creditors.

The reorganization also requires approval from the state Public Utilities Commission.

Hawaiian Telcom said it will emerge from bankruptcy with a minimum of $45 million in cash, plus a $30 million undrawn revolving credit facility.

The reorganization calls for the company to convert $590 million in senior secured debt into new stock in the reorganized company.

Owners of about $350 million in Hawaiian Telcom senior notes will receive warrants to acquire 12.75 percent of the new equity of the reorganized company and subscription rights to purchase new equity up to $50 million.

The company said it also will obtain a new, five-year $300 million loan once it emerges from bankruptcy.

The Carlyle Group currently owns $428 million in Hawaiian Telcom's stock but that stock will become worthless under the reorganization.

Carlyle will retain a small ownership stake because it is part of the lending group whose loans will be converted into equity. Carlyle currently holds about $6.8 million of the company's $590 million of senior debt.

Founded in 1883, Hawaiian Telcom is the state's largest phone company, with 1,400 workers and annual operating revenues of about $500 million.

The company filed for bankruptcy protection Dec. 1 due to its heavy debt load and the loss of thousands of customers to wireless and other competitors.

Analysts have said the phone company's debt made it difficult to make adequate investments in its infrastructure.

Lowering Hawaiian Telcom's $4.2-million-a-month debt payments would allow the company to revive plans to offer Internet-based video service and Internet-based phone service, they said.

"Reducing the debt will allow the company to put money into new equipment, keep some of its existing customers and attract new customers," said Sam Greenholtz, co-founder of Telecom Pragmatics Inc., a Nashville, Tenn.-based consulting firm.

"It's got to help."