The bank debt for McLeodUSA took a 10-point dive last week and is now quoted at 28-30. One trader noted that the distressed company has been looking for a buyer, but no viable bids have come in. Earnings results for the telecom-services provider continue to be poor, he added. Officials at McLeod did not return repeated calls.
"Clearly an acquisition would be better for the lenders as this would indicate that a buyer sees value in integrating the company. Most of that value would come from intangible assets, such as customer lists and rights of way," said James Veneau, a v.p. and senior analyst with Moody's Investors Service. In contrast, "The fixed assets of the company are not worth a lot in liquidation," he noted. Veneau did not rule out a sale, but commented, "There is a binary result here. Someone could buy them and the value will be significantly higher at time of purchase."
In addition to a possible asset sale, the Cedar Rapids, Iowa-based company has been negotiating a restructuring with its lenders for several months that will convert the senior secured debt into equity. The bank debt, led by JPMorgan and co-arrangers Bank of America and Citigroup, comprises a $376.5 million senior secured term loan "B," 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. However, McLeod failed to make an $18.1 million interest and principal payment in April and is not paying the coupon on the debt. The company entered into a foreberance agreement with the lenders in March that runs through July 21. The lenders that signed the forebearance agreement include Wayzata Recovery Fund, Allstate Life Insurance Co., Merrill Lynch, Credit Suisse, Citigroup Financial Products, Bayerische Hypo-und Vereinsbank, Jefferies & Co. and Fidelity Management Trust Company.
If McLeod cannot find a buyer, extend the forebearance or obtain a restructuring, it will file for bankruptcy for the second time, according to the statement from the company. There are no bonds in the capital structure, but if 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 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.
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