Qwest Communications International Inc. (NYSE: Q) announced today that a debt exchange with investors should allow it to slash its towering debt-load by nearly $2 billion (see Qwest Cuts Debt).

The market reacted positively to the news, sending the company's stock soaring 7.36 percent to $5.69 a share.

Despite the market reaction, some industry analysts were disappointed by the announced deal. Qwest had been hoping to swap as much as $12.9 billion in debt securities of its subsidiary, Qwest Capital Funding (QCF), but said today that debt holders had exchanged only about $5.2 billion in debt when the offer expired on Friday night.

"The exchange was somewhat disappointing, considering that Qwest was only able to reduce its debt principal by $1.9 billion, versus its targeted $2.6 billion," writes Guzman & Company analyst Patrick Comack in a note today.

Exchanging old notes with new ones with lower principals and higher interest rates, Qwest will slash its debt by about $1.9 billion, from $24.5 billion to $22.6 billion. The move also allows the carrier to extend some near-term maturities, it said in today’s statement.

Uncertainty has surrounded the debt exchange, which was announced last month (see Qwest Offers Debt Exchange). Four of the company’s debt holders filed suit to block the exchange, claiming that it violated securities law. They also lamented that debt holders were being coerced to accept the exchange, since not accepting the offer would mean weaker claims in the case of bankruptcy. Last Thursday, just a day before the tender offer expired, the bondholder group withdrew its suit against the service provider (see Plaintiffs Dismiss Qwest Complaint and Qwest Moves to Dismiss Complaint).

But although Qwest did not manage to exchange as much of its debt as it would have liked in the offer, several industry observers say it is definitely a step in the right direction. Weighed down by nearly $25 billion in debt and faced with faltering profits, a more than difficult economy, and several ongoing state and federal investigations into its accounting and business practices, Qwest has been taking some drastic steps to ward off bankruptcy, including selling its lucrative QwestDex directory service for $7.05 billion (see Qwest Sells Directory Service).

“It is important for them simply because the company needs to reduce its debt load in the near term,” says Baylock & Partners L.P. analyst Rick R. Black. “This helps get the company in a much better financial state.”

Black cautions, however, that the deal was not as good as Qwest might have hoped, since relatively few bondholders with short-term maturities opted in on the exchange. For notes due in 2004 and 2005, for instance, only 23 percent and 16 percent of the company’s bondholders, respectively, decided to join the exchange. This compares to 57 percent of holders of debt maturing in 2010, and 44 percent of holders of notes due in 2011.

This is only natural, Black says, pointing out that prospects for short-term survival are more likely. Bondholders with debt coming due in the next few years didn't see a reason for offering the company a discount. “It will be interesting to see if Qwest is going to come back with another, slightly sweetened offer to bondholders,” Black says.

In its statement today, Qwest said that the issuance of a total of $3.3 billion new notes of Qwest Services Corporation would be settled on Thursday. The figures, the company said, are subject to final settlement calculations.

Qwest did not return calls by press time.

— Eugénie Larson, Reporter, Light Reading