Qwest dives after earnings, widened SEC probe; Aquila drops on downgrade

By Carlise Newman

Chicago, May 29 - Contradictory news had Qwest Communications International Inc.'s debt oscillating wildly Thursday in distressed debt trading, with Qwest reporting a profit, but also a widened probe into its accounting practices.

Despite a sharp fall in revenue, Qwest returned to profitability in the first quarter, in contrast to a huge loss a year ago. As part of its ongoing financial restatements, the phone and data company also revealed $3.1 billion in additional losses over the past three years.

Qwest's 6 5/8% bonds due 2021 were four points lower at the end of the session to land at 75 bid/76 offered, according to a trader. Its 7¼% notes due 2011 fell three points to 78 bid/80 offered. The company's bank debt remained steady at 97 bid/98 offered.

"They opened lower, dropped about six points mid-day but then were bid back up a little by the close," said a distressed debt trader.

Denver-based Qwest said it earned $150 million or 9 cents a share in the three months ended March 31. The company lost $23.9 billion or $14.32 a share a year ago. The latest results included a $206 million gain from Qwest's adoption of a different method of accounting for its pension obligations.

Without one-time gains and revenue from discontinued operations, Qwest lost 7 cents per share, 2 cents better than expected. Revenue fell 9.4 % to $3.6 billion, from $4 billion a year ago.

Qwest blamed tougher competition in its mainstay local phone business as well as in the wireless market. The company lost 130,000 local lines, down from 157,000 in the fourth quarter. Qwest also sold less equipment and scaled back efforts to expand its money-losing long-distance business outside its main region. At the end of the quarter, Qwest reported $22.3 billion in long-term debt, down slightly from $22.7 billion in the previous quarter.

Qwest also said it expects revenue to decline by an annual percentage rate in the mid-single digits.

In addition, Qwest said the Securities and Exchange Commission has expanded its investigation into the company's accounting and revenue booking practices. The probe will include "further adjustments and restatements the company has made as well as additional transactions.

Qwest has said it would restate $2.21 billion in sales of optical network capacity, equipment and other services for the fiscal years 2000 and 2001.

Aquila Inc. debt took a wallop after UBS Warburg equity analysts downgraded the company. UBS Warburg said on Thursday it cut the power company to reduce from neutral, saying the company's long-term prospects are limited and could include a restructuring.

Aquila's 7 5/8% notes due 2009 were seen at 79 bid/81 offered, down three points from Wednesday when they were seen at 82 bid/84 offered, according to a trader.

Magellan Health Services Inc.'s 9% senior subordinated notes due 2008 were slightly better bid Thursday, rising to 36 bid/37 offered, one point higher than Wednesday. The bonds had risen three points on Wednesday.

The jump was the continuing reaction to previously reported news that Magellan has obtained a commitment for an equity investment of up to $150 million from Onex Corp. upon emerging from Chapter 11.

The $150 million investment will replace a previous $50 million equity commitment from unsecured creditors, providing the reorganized company with a stronger balance sheet than it would have had under the prior commitment, Magellan said.

Under the commitment, Toronto private equity firm Onex will invest $100 million in the reorganized company in exchange for new equity representing 29.9% of the outstanding common equity of the reorganized Columbia, Md.-based managed care organization.

"Magellan has been more active than usual recently, especially yesterday, but the enthusiasm has died down and tomorrow's Friday so don't expect to hear a peep from them then," said a distressed debt trader.

However, one name that has been extremely active in the last month is Adelphia Communications Corp.

"The news just keeps flowing on them," said a trader. "Not always good but nothing seems to hurt them too badly recently."

The Greenwood, Colo.-based cable television company said late Wednesday it had reached an agreement with the initial debtor-in-possession lenders on the covenants for its $1.5 billion facility. The lenders also approved Adelphia's operating and capital budget through June 2004, which enables it to access the full $1.5 billion DIP facility.

Adelphia's 10 5/8% notes due 2010 were quoted as rising two points to 55 bid/56 offered, from 53 bid/54 offered, the trader said. Adelphia's Olympus term loan B was better bid as well, up ¼ point to 87¼ bid/88 offered.

The company said it would use the financing to upgrade its cable systems to launch new services such as digital cable and high-speed Internet in an effort to compete with satellite television rivals.

Western Wireless Corp. was reportedly very active, with its bank debt trading as low as 92¼ bid at one point, and later trading as high as 93.

Western Wireless is a Bellevue, Wash. provider of wireless communications services.

Owens Corning's bank debt traded "around 57" Thursday, in context with previous levels.

As previously reported, the Toledo-based building materials manufacturer filed a second amended plan of reorganization Friday.

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