The bank debt for McLeodUSA continues to sink, with the $376.5 million "B" loan quoted at 32-37 from the 39 context where it was posted two weeks ago. The troubled telecom-services provider is negotiating a restructuring that will convert the company's senior secured debt into equity. Other potential alternatives to improve liquidity include asset sales or a strategic partner. If none of these options pan out, McLeod will likely have to file for bankruptcty.
The company failed to make an $18.1 million interest and principal payment on its bank debt last month and entered into a forbearance agreement with lenders last March that ends May 23, according to James Veneau, a v.p. and senior analyst with Moody's Investors Service. By not making the payments, McLeod expects to maintain operations without service disruptions.
The bank debt, led byJPMorgan and co-arrangers Bank of America and Citigroup, also includes a $150 million "A" loan and a $150 million revolver. The weighted average interest rate at the end of last year was 5.6% on the pro rata and 6.4% on the "B" loan.
There are no bonds in the capital structure, but if Cedar Rapids, Iowa-based McLeod converts the debt into equity, current holders of the preferred and common stock are likely to be wiped out. Forstmann Little & Co. has a significant ownership stake in the company. In 1999 the private equity firm invested $1 billion in McLeod. When the company went through a bankruptcy reorganization in April 2002, retiring more than $3 billion in debt, Forstmann then invested a further $175 million in exchange for common stock and warrants.
The Competitive Local Exchange Carrier (CLEC) model has always been challenging, said Veneau. He explained that start-up costs are high and there is a need to deploy capital selectively. Five-or-six years ago McLeod was highly levered and even with the first restructuring [in 2002] they are still overlevered. "The variability and vulnerability of the business model does not allow for this and they've stated they cannot support the debt load."
Revenues are also not picking up. McLeod reported first quarter revenues of $160.5 million, compared to $193.6 million a year ago. And there are impending challenges. According to McLeod, recent merger announcements in the industry will cause the large telecommunications providers to become even more aggressive, further challenging the company's ability to grow revenue. "There are viable CLECs out there. It's a matter of finding the right capital and cost structure and having the appropriate business strategy," Veneau concluded. Ken Burkhardt, cfo, did not return calls.
