Qwest Communications International is seeking to negotiate a new longer-term credit line with J.P. Morgan and Bank of America to replace the cp backstop line unexpectedly drawn two weeks ago. Joseph Nacchio, ceo, acknowledged in a conference call to analysts last Friday that the banks want higher interest spreads than they currently offer to Qwest and Robin Szeliga, cfo, added, "They need to earn an appropriate rate of return on their assets." The current $4 billion backup line is priced at LIBOR plus 11/ 8% according to Capital DATA Loanware. Qwest met with lead lenders last week after conducting a series of one-on-one meetings with the syndicate.
Any new credit facility needs to reflect a weaker credit profile and provide greater covenant headroom, according to Greg Zappin, director at Standard & Poor's. The company's $4 billion, 364-day facility matures in May, but currently the only financial covenant in the agreement is a 3.75 times total debt to EBITDA ratio. At year-end the company was leveraged at about 3.4 times. "There are some things they [the banks] are uncomfortable with in the current facility," Nacchio noted, explaining Qwest's ability to draw down on the credit with an option to extend it for a year is a sticking point.
S&P downgraded the corporate credit ratings to BBB from BBB+ and the commercial paper ratings on Denver-based Qwest to A-3 from A-2. Unable to roll over its commercial paper last month, Qwest drew down on its $4 billion backstop. "The downgrade is based on Qwest's more limited financial flexibility and near-term liquidity concerns, and a challenging operating environment," said Zappin. The draw down of the commercial paper backstop also raises the wider issues of risk/return on unfunded credit lines. With companies in certain sectors more likely to need to draw down on backup lines if the CP market is inaccessible, banks are said to be re-appraising the tactic of pay to play (LMW, 2/25).