Carrier Pile-Up Claims McLeodUSA
The CLEC (competitive local exchange carrier) has become the latest in a series of service providers admitted to the financial intensive care unit.
Earlier this week, Global Crossing Ltd. (NYSE: GX) filed for bankruptcy to avoid liquidation (see Global Crossing Falls Overboard and Global Crossing: Telecom's Enron?). Also, Level 3 Communications Inc. (Nasdaq: LVLT) and Williams Communications Group (NYSE: WCG) both spent this week deflecting increasing skepticism regarding their debt levels and financing.
Analysts found some silver lining in the McLeodUSA debacle, however, since its recapitalization agreement is similar to the one proposed earlier, which seemed objectionable to the company's bondholders (see McLeodUSA on the Brink )
"There's nothing new here. What is surprising is that the bondholders agreed to a proposal so similar to the original one," says a Wall Street analyst who requested anonymity. "They seem to think it's as good a deal as they're going to get in this market. The value of assets in the market now is unknown. They figured one in the hand was worth two in the bush."
That's hardly a vote of confidence, since the alternative to the present arrangement would have been full liquidation of McLeodUSA's assets.
Terms of the arrangement do call for some key assets to be divested. Specifically, McLeodUSA is required to go ahead as early as possible with the agreement to sell its Yellow Pages business to Yell Group. Further, it must agree to sell subsidiary Illinois Consolidated Telecom Company (ICTC).
McLeodUSA previously sold 350 points of presence for dialup access and IP connectivity to Level 3.
Meanwhile, Level 3 is having troubles of its own as it had its corporate credit rating reduced to junk status Wednesday by Standard & Poors (S&P), one of Wall Street’s major credit rating firms.
The lower rating follows Level 3’s Tuesday earnings announcement, in which it disclosed that it might violate a revenue-based financial covenant tied to a $1.775 billion senior secured credit facility in a few months if its business doesn’t improve. Level 3 acknowledged that, though it's working to keep costs down, its new sales are being offset by customer disconnects from startup carriers and other businesses that have gone under. This could mean that the company is going to have a tougher time paying off debts and borrowing more money.
S&P cut Level 3’s corporate credit rating to CCC+ from B- (CCC is the 7th lowest out of 10 basic grades given to companies, based on how well they appear to be able to repay debts). The agency also cut Level 3’s senior and subordinated debt ratings, which were already rated as junk.
Williams Communications' troubles started when its former parent, Williams Companies Inc., said Tuesday that it would delay its fourth-quarter 2001 and year-end earnings to assess its financial obligations to Williams Communications.
In light of Enron’s recent meltdown, investors were worried that the energy company might end up in trouble, since it is responsible for about $2.2 billion of Williams Communications debt and fiber optic leases (see Enron's Empty Bandwidth).
Between the close of business last Friday and Wednesday afternoon, Williams, the energy giant, saw its stock drop some 34 percent, from $24.76 to $17.15. Trading of its shares were halted briefly on the New York Stock Exchange Wednesday afternoon.
Williams Co. CEO Steve Malcolm, in a statement late Wednesday, said the company was committed to earnings growth or using “asset sales, capital-spending reductions, expense reductions” and other financial tools to, if needed, satisfy its “contingent obligations of up to $2.2 billion related to Williams Communications."
In mid January, S&P cut Williams Communications corporate credit and senior secured debt ratings from B to CCC+.
— Mary Jander and Phil Harvey, Senior Editors, Light Reading