Allegiance Telecom seeks amendment to avoid possible covenant violations

By Sara Rosenberg

New York, Nov. 15 - Allegiance Telecom Inc. is currently in discussions with lenders about amending its senior secured credit agreement to allow more flexibility in operating the business and reduce the risk of non-compliance with covenants. Furthermore, the company is currently evaluating recapitalization transactions that would reduce overall debt.

"We believe that the risk related to potential defaults under our financing agreements has increased due to the financial failures and difficulties of other communications companies. We believe that these events have caused many lenders to be even more reluctant to waive defaults or otherwise restructure credit arrangements," Allegiance said in a filing with the Securities and Exchange Commission.

The Dallas telecommunications company blames these possible covenant issues and the risk of default for the depressed valuation of its stock and debt. "In fact, the risks of staying in compliance with the covenants have been cited by a number of equity and debt analysts and bond rating agencies in their recent downgrades of our securities," the filing said.

In order to remain in compliance with covenants, the company has developed and is executing a high revenue growth plan in 2002. For 2003 and 2004, higher growth rates in quarterly EBITDA are needed to remain in compliance so the company plans to reduce growth and expenses, and make value-accretive acquisitions.

In June, Allegiance Telecom requested to draw down the remaining $150 million under its revolver due Dec. 31, 2006. At June 30, $129.3 million had been funded and an additional $6 million was funded in early July. As of Sept. 30, three of the 26 banks have not funded the requested sums and have asked for additional information to determine whether or not they are required to provide the money.

"We believe that these 3 banks are in default of the credit agreements and have notified them accordingly. We may have to pursue our claims against them in court in an effort to obtain the $14.7 million that we believe should have been funded in June under the terms of our credit facility," the filing said.

The interest rate on the recently drawn funds is 5.24% per annum and will remain fixed until December.

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