McLeodUSA files pre-packaged Chapter 11, to sell corporate headquarters for $27 million

By Caroline Salls

Pittsburgh, Oct. 28 - McLeodUSA Inc. made a pre-packaged Chapter 11 filing Friday with the U.S. Bankruptcy Court for the Northern District of Illinois.

The company said it has received the support of the majority of its lenders representing more than 90% of its debt for its plan of reorganization.

According to a company news release, McLeodUSA's pre-packaged reorganization plan should allow it to complete a restructuring of its $777.3 million in debt as quickly as possible, while continuing to maintain normal business operations.

According to the disclosure statement for the plan filed with the Securities and Exchange Commission, the company's revenues have been in decline since 2002, despite being forecasted to increase.

"Reasons for the decline in revenue include weakness in segments of the telecommunications industry, turnover of customers to competitors in excess of new customers acquired, reduction of long distance minutes used by its customer base, reduction in access rates as mandated by the FCC and lower prices for some of its products," according to the disclosure statement.

"In response to these challenges, the company has taken a number of actions, including introduction of new competitively priced and technologically advanced products, reorganization of its sales operations, hiring of experienced executive sales leadership, expanding the involvement of the executive staff in the sales process and reducing customer churn.

"However, these actions to date have not resulted in profitable new revenue growth which continues to be a challenge as the company competes against large, financially strong competitors with well-known brands.

"In addition, the company believes that the large telecommunications providers will likely become even more aggressive upon the closing of pending mergers and further consolidation in the telecommunications industry, further challenging the company's ability to grow revenue."

As of June 30, the company had $674 million in assets and $1.01 billion in debt. It had 2.32 million shares of series A preferred stock, 10 shares of series B preferred stock, 201.69 million shares of series A common stock, 78.2 million shares of series B common stock and 35.55 million shares of series C common stock, according to court documents.

Including in the listing of McLeodUSA's largest unsecured creditors are:

* JPMorgan Chase Bank, NA of New York as administrative agent on the company's pre-bankruptcy secured debt, with a $677.3 million bank loan claim;

* Qwest of Chicago with a $5.52 million trade debt claim;

* Ameritech-CABS of Chicago, with a $5.26 million trade debt claim;

* Southwestern Bell Telephone of St. Louis, with a $2.55 million trade debt claim;

* US West Communications of Seattle, with a $1.8 million trade debt claim; and

* UUNet of Tampa, Fla., with a $1.09 million trade debt claim.

The company has about $27 million in cash available as of Friday and has secured a commitment from its lenders for debtor-in-possession financing of up to $50 million from JPMorgan Chase Bank, NA, to be replaced upon its exit from bankruptcy with a new $50 million revolving credit facility, the release said.

The DIP facility will include $15 million for letters of credit.

The DIP will mature at the earliest of six months; upon the acceleration of the loans; upon the consummation of the plan of reorganization and 45 days after entry of an interim DIP order.

Interest will be Libor plus 400 basis points. The letter-of-credit fee will be 400 basis points. The unused portion fee will be 50 basis points.

Maturity on the exit facility will be five years. Interest will be Libor plus 750 basis points, with a 50 basis point unused portion fee.

Plan of reorganization

McLeodUSA's $677.3 million of secured junior debt will be converted into 100% of its equity, and its existing $100 million in secured senior debt will be cancelled and replaced with a $100 million term facility.

All of McLeodUSA's existing preferred and common stock will be canceled, and holders of that stock will have no recovery under the plan of reorganization.

Treatment of creditors under the plan will include:

* Holders of other secured and general unsecured claims will receive 100% recovery though reinstatement of their claims;

* Holders of $100 million in junior secured pre-bankruptcy lender claims will receive 100% recovery in cash;

* Holders of $677.28 million in senior secured pre-bankruptcy lender claims will receive 27% to 38% recovery in 100% of the new common stock of the reorganized company, plus cash for fees and expenses required under the credit agreement.

McLeodUSA to sell headquarters

In addition, the company has reached an agreement to sell its corporate headquarters in Cedar Rapids, Iowa, to Life Investors Insurance Co. of America, an Aegon USA Inc. affiliate, in a transaction valued at about $27 million.

The sale is expected to close by the end of the year.

McLeodUSA employees working at its Technology Park campus will relocate to a leased facility owned by Aegon in Hiawatha, Iowa. The relocation is expected to be completed during second quarter of 2006.

"Based on our current business strategy, a smaller facility that continues to provide a professional business environment for our employees simply makes good economic sense," acting chief financial officer Joe Ceryanec said in a company news release.

"Proceeds from the sale of our headquarters building will be used to pay down a portion of the $100 million term debt facility the company intends to enter into upon completion of its restructuring."

McLeodUSA is a Cedar Rapids, Iowa-based integrated communications services company. Its Chapter 11 case number is 05-63230.

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