Qwest Gets a Reprieve

Qwest Communications International Inc. (NYSE: Q) gave investors something to celebrate this morning. The carrier, which has been struggling to straighten out its balance sheet over the past couple of months, announced today that it is amending its $4 billion bank credit agreement so that it can carry a higher percentage of debt (see Qwest Amends Credit Agreement).

Investors, who have shown weak support for Qwest and other large service providers recently, rewarded the company’s efforts by pushing its stock up $0.64 (7.37%) to $9.32 in midday trading.

But Qwest still has several challenges ahead. For one, just last week, the Securities and Exchange Commission (SEC) began a preliminary inquiry into the company’s accounting practices (see Qwest Prepared to Answer Feds). Qwest also faces a slim revenue outlook. Still, company officials insist it will pull through, expecting positive cash flow in the second quarter of this year.

Last month Qwest, was forced to use up its $4 billion backup line of credit after being shut out of the short-term debt market (see Qwest Sees Light at End of the Tunnel). The carrier 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 about $3.4 billion (see Qwest Fights Back ).

Under today’s amended bank credit agreement, Qwest is allowed a maximum debt-to-cash-flow ratio of 4.25 through Sept. 30. But it must lower that ratio to 4.0 over the following two quarters. Previously, the allowable ratio was 3.75.

Qwest still needs to reduce its debt further and will likely need to sell off assets in order to do that. Analysts expect the company to sell its DEX telephone directory publishing unit, as well as local telephone lines and wireless assets, in the near future. But with many service providers like Global Crossing Ltd. (NYSE: GX) and McLeodUSA (Nasdaq: MCLD) in bankruptcy and a slew of others like Williams Communications Group (NYSE: WCG) and Level 3 Communications Inc. (Nasdaq: LVLT) also trying to sell off assets to clean up their balance sheets, it may be difficult to get top dollar (see Global Crossing Falls Overboard, Williams Ponders Bankruptcy, and Is Level 3 Next?).

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

— Marguerite Reardon, Senior Editor, Light Reading
MP_UK 12/4/2012 | 10:46:31 PM
re: Qwest Gets a Reprieve Possibly I'm being a bit thick here, but could someone explain (in laymans terms,) what 'restructuring debt' means, and what 'debt-to-cash-flow ratio' is...? Ta.
zweisel 12/4/2012 | 10:46:22 PM
re: Qwest Gets a Reprieve Hope this helps:

"restructuring debt" means that the bank will renegotiate the terms of payment for existing loans such that the company does not totally default on the loan. For instance, a lower interest rate, smaller monthly payments, or extending the loan duration. Of course, there are many ways to restructure debt but these are the main ones.

"debt-to-cash-flow ratio" this is the ratio between the amount of debt owed by the company and the cash flowing through the company. Banks usually design ratios that companies must maintain in order to have their debt held off until they are in better fiscal shape. This ratio is one of them. It is a measure of the amount of debt versus the amount of cash flowing through the company.It basically should be as low as possible. A ratio of 5 means it would take 5 years to pay of the debt at the given cash-flow levels.

Hope this helps! Have a beer.
hj 12/4/2012 | 10:46:19 PM
re: Qwest Gets a Reprieve Well, they would be able to pay off their debt in 5 years if there were no other demands on their cash whatsoever. As long as they have payroll, leases, etc, it would take much longer than 5 years to pay this off.

Or at least that's my understanding. I'm no accountant.
zweisel 12/4/2012 | 10:46:18 PM
re: Qwest Gets a Reprieve ... the cash flows are after they pay off leases, pay rolls, and so on...
MP_UK 12/4/2012 | 10:46:10 PM
re: Qwest Gets a Reprieve zweisel
Hope this helps! Have a beer.

Makes sense, thanks for the reply. Also, good advice - I'm off to the pub!
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