Qwest bank debt skyrockets on QwestDex LBO; Charter drops on Moody's outlook revision

By Sara Rosenberg

New York, Aug. 20 - What could be better for a company with liquidity concerns than a $7.05 billion leveraged buyout of one of its businesses? Not much. Qwest Communications International Inc. proved on Tuesday that a little extra cash goes a long way as far as investor confidence is concerned. The company's bank debt soared into the mid to high 80's from previous levels in the 70's, according to a trader, after the company announced an agreement to sell QwestDex to The Carlyle Group and Welsh, Carson, Anderson & Stowe.

In other news, Charter Communications Inc. continued its downward spiral, this time spurred on by Moody's Investors Service lowering the outlook on its rating to negative from stable, according to market sources.

"I have not seen [Qwest] trade, but I heard it's being quoted higher," the trader said. "It makes sense. If these transactions happen it's significant cash for the company."

The sale is in two parts: the first, covering operations in Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota, is for $2.75 billion and is expected to close in the fourth quarter of this year; the second, covering Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming, is for $4.30 billion and is expected to close in 2003.

In the beginning of August, the Denver, Colo. telecommunications company revealed debt restructuring plans that included negotiations with administrative agent Bank of America on modifying its credit facility to extend the term and increase covenant room.

Furthermore, in mid-August, the company announced that it started soliciting commitments for its proposed $500 million bridge loan for QwestDex, its directory services business. The facility has an interest rate of Prime plus 875 basis points or 14% and an upfront fee of 300 basis points, according to market sources.

Banc of America Securities LLC committed $200 million of the loan. The balance is expected to come from other lenders but presently the facility "is not fully underwritten", a financial professional previously told Prospect News.

During a conference call earlier this month, company officials stated that it the sale of QwestDex is completed, the company would probably roll the new credit facility "into some sort of other security arrangement. [The facility] clearly wouldn't survive the sale of Dex, but that's a happy problem to have."

Meanwhile, Charter Communications bank debt was quoted in the low 80's - a couple of points lower from Monday's mid-80's quotes of a bid around 84 and an offer around 86, according to a trader. On Friday, the company's bank debt was bid at 86 and offered at 88.

The loan traded at 831/2, according to a second trader, and was bid in the low 80's. "The trade was a dealer to dealer trade," he said.

Ratings that were affected by Moody's revised outlook included Charter's senior debt rating of B3 and senior unsecured issuer rating of B3. Furthermore, the outlook was changed on Charter Communications Holdings, LLC's senior debt at B2, Charter Communications Operating, LLC's senior secured bank debt at Ba3, CC VIII Operating, LLC's senior secured bank debt at Ba3, Falcon Cable Communications, LLC's senior secured bank debt at Ba3 and CC VI Operating, LLC's senior secured bank debt at Ba3.

There could be more pressure on Charter Wednesday. Too late to affect trading on Tuesday Standard & Poor's downgraded the company by two notches, saying it was concerned that potentially slower cash flow growth may make it difficult for the company to achieve the financial profile improvement S&P is expecting.

S&P also said the recently launched federal criminal investigation into Charter's accounting practices and any resulting adverse effect on the company's access to the capital markets factored into the downgrade.

Moody's said its outlook change was attributed to "the growing likelihood that the company's ratings may come under some downward pressure over the forward rating horizon, particularly if the current federal grand jury investigation reveals accounting irregularities of either a magnitude or nature to which we are presently unaware." However, the rating agency continued to say that the financial restatements are expected to be "relatively immaterial" and have minimal impact on the company's performance.

The bigger concern, according to Moody's, is the St. Louis, Mo. cable company's high consolidated financial leverage and comparatively low interest coverage.

"We will remain watchful of heightened churn, bad debt experience and/or a slowdown in new business development over the interim period as we further analyze the credit profile of the company and its ability to remain on track in terms of growing into its now weakly positioned Ba3 rating on a senior implied basis," Moody's noted.

"Still, liquidity is reasonably well assured as effected mainly through availability under the company's undrawn bank lines of credit, access to which should be permitted given anticipated compliance with financial maintenance covenants. We expect that these bank lines should be sufficient to fund the business plan until Charter is in a position to generate positive free cash flow in 2004," Moody's concluded.

While Moody's seemed relatively optimistic about the St. Louis, Mo. cable company's future, the negative outlook had the bank loan market worried mainly due to the possibility of a Charter debt sell-off by CLOs.

"The problem with Charter is that a lot of CLOs that own it would have get rid of some of the paper if the name were to be downgraded," a trader said. "There's a lot of paper out there."

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