Qwest Gets New Breathing Room On Credit Pact

Qwest Communications International Inc.

The Denver-based company, whose accounting practices are the subject of a preliminary probe by the U.S. Securities and Exchange Commission, said it has enough cash and borrowings under its credit pact to pay debt maturing in the next 12 months and to fund its capital and operating expenses.

Shares of Qwest jumped 92 cents, or more than 10 percent, to $9.60 in morning trade on the New York Stock Exchange. The shares have plunged about 77 percent over the past 12 months, underperforming the North American Telecommunications Index by about 76 percent.

"It's a first step. It does help out that their lenders are willing to provide more room on the loan covenants, but the bankers are requiring that asset sales be used to pay down debt. So it doesn't appear that the bankers are providing a lot of leeway to Qwest," said Davenport and Co. analyst Drake Johnstone.

Although Qwest won more breathing room, analysts said the company still faces several long-term challenges, such as the SEC probe, rattled investor confidence, and slim revenue growth. The company said it still expects to become cash flow positive in the second quarter.

Qwest and other high-speed communications companies have been battered by a glut of network capacity, slim demand in the weak economy, falling prices, and stiff competition.

Rivals Global Crossing Ltd. and McLeodUSA recently filed for bankruptcy, while Metromedia Fiber Network Inc. on Monday warned that it may file for bankruptcy if it is unable to restructure its debts.

Last month Qwest, the dominant local phone company in 14 states from Minnesota to Washington state, was forced to use up its $4 billion back-up line of credit after being shut out of the short-term debt market.

Qwest used $608 million in proceeds from a recent $1.5 billion sale of senior notes to pay down some of that $4 billion debt, but it still owes $3.4 billion.

Qwest's new 8.875 percent notes maturing in 2012 were yielding 8.7 percent on Monday, 3.4 percentage points more than 10-year U.S. Treasuries, a trader said. The spread was 3.6 points on Friday.

Under the amended bank credit agreement, Qwest is allowed a maximum debt-to-cash-flow ratio of 4.25 through Sept. 30. It must lower that ratio to 4.0 in the following two quarters. The previous ceiling for the ratio was 3.75.

Qwest could have been in default of certain requirements in its loan agreements if it had failed to cut its debt-to-cash-flow ratio.

Qwest has been weighing the sale of its DEX telephone directory publishing unit, as well as telephone lines and wireless assets, to help raise cash. Analysts said it may be difficult to get top dollar for those assets in the weak telecoms market.

Qwest agreed to use a portion of proceeds from future asset sales and capital market transactions to repay the bank debt until the outstanding loan is $2 billion or less.

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