Hawaiian Telcom Inc.'s bonds have lost more than $320 million of their value in recent months amid growing concerns of a possible default.

Since January, the value of Hawaiian Tel's high-yield or junk bonds have plummeted by nearly two-thirds from $500 million to about $173 million, according to Bloomberg LP.

The decline is more bad news for the state's largest phone company, which has lost thousands of customers and tens of millions of dollars, and is under investigation by the state Public Utilities Commission for poor customer service.

Earlier this month, Moody's Investor Service downgraded its prospects for the company, saying Hawaiian Telcom has a "heightened probability" of a bond default. According to Moody's, the company may not have enough cash to cover its obligations if major operational improvements aren't made in the next 18 to 24 months.

"The company's recent operating results ... and the recent change of leadership has spooked the investment community," said Dmitri Triantafyllides, president of Sixty Guilders Management LLC, a hedge fund manager based in Charlotte, N.C.

Robert Reich, Hawaiian Telcom's interim chief financial officer, said there's no risk of a default and that the lower bond prices are reaction to the company's recent financial reports and to broader problems in the nation's credit markets.

He said the lower bond prices aren't an accurate gauge of the company's long-term prospects.

"Our position is that ... we have adequate liquidity for the foreseeable future," Reich said.

Founded in 1883, Hawaiian Telcom is the state's largest telephone company and has 1,500 employees. The company is owned by the Carlyle Group, the Washington, D.C., private equity firm that acquired the local phone company from Verizon Communications Inc. in 2005 for $1.6 billion.

$200 MILLION IN LOSSES

Since the 2005 takeover, Hawaiian Telcom has lost more than $200 million. The company reported a $117.3 million net profit last year largely because of the $435 million sale of its profitable directories publishing business. Minus the sale of the phone book unit, Hawaiian Telcom had an operating loss of $19.4 million last year.

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 560,000 residential and business lines.

Those competitive pressures were exacerbated by Hawaiian Telcom's decision to switch to its new in-house "back office" support systems in April 2006, even though those systems weren't yet fully functional.

That resulted in erroneous bills, recurring billing problems, missed installation and repair appointments, and long waits for customer service.

"What's sad is that 25 years ago, Hawaiian (Telcom) was one of the stable companies," said Terry Lee, president and chief executive officer of Lee Financial Group, a local money management firm.

"You bought Hawaiian (Telcom) bonds just like you bought stock in Hawaiian Electric."

Hawaiian Telcom issued its bonds to help finance the Carlyle Groups' buyout of the local telephone company.

The bonds, which total $500 million, were put on the market in three separate issues. The coupon rates on the bonds range between 9.75 percent and 12.5 percent.

PROBLEMS WITH DEBT

Most of the bonds are held by institutional investors such as Capital Research and Management, Pimco Advisors LP and Prudential Financial Inc., which in turn manage and market high-yield bond funds to individual investors, pension funds and other corporate clients.

If Hawaiian Telcom defaults or fails to make interest payments on its bonds, investors could demand their money back, creating a liquidity crisis. A default could require a cash infusion by Carlyle. In the worst-case scenario, it could lead to a bankruptcy filing.

Triantafyllides, the hedge fund manager, said Hawaiian Tel's slumping bond prices come as the overall high-yield market has bounced back in recent weeks.

The bailout of Bear Stearns was a turning point in the turmoil in the nation's credit markets, leading to a rebound in the high-yield market.

The problem: Debt. In addition to the $500 million bonds, Hawaiian Telcom borrowed another $600 million from lenders to finance its purchase of the local phone company.

That, according to Triantafyllides, gave the company little wiggle room when it ran into operational problems.

"When you have a lot of leverage, you have little room of variances," he said.