Allegiance Telecom amends credit facility, modifying covenants in return for debt cut

By Peter Heap

New York, Nov. 27 - Allegiance Telecom, Inc. said it amended its $500 million senior secured credit facility, replacing covenants through April 2003 with new ones in return for agreeing to dramatically reduce its debt during the waiver period.

Allegiance said it must pay down $15 million of the credit facility but otherwise retains full use.

During the waiver period the Dallas telecommunications company will work with its bank lenders on a permanent amendment which must be in place by April 2003. Alongside those negotiations, Allegiance said it will be "pursuing numerous financial and strategic alternatives to reduce its total indebtedness."

Under the terms of the amendment, the company must reduce its debt to $660 million by April 30, 2003 from its current level of $1.2 billion. Options being examined include issuing new equity or equity derivative securities for cash to retire outstanding debt, using cash to retire outstanding debt or issuing equity or equity derivative securities in exchange for outstanding debt.

"We are very pleased with this new arrangement," said Royce J. Holland, chairman and chief executive officer of Allegiance Telecom, in a news release. "For the past year, Allegiance has labored under financial covenants that were no longer appropriate given the shift in the telecom industry from focusing on rapid growth to an emphasis on profitability and cash generation."

"We will have grown Allegiance's revenue over 45% in 2002 while most other carriers are seeing no growth or declining revenues. Allegiance Telecom plans to continue taking market share because our business opportunity is greater than ever, but we and our senior creditors agree that focusing on free cash flow is a more appropriate measure of success in the current environment. Under our revised plan, Allegiance is targeting positive free cash flow from operations during the second quarter of 2003 while continuing to produce a double digit annual growth rate."

Existing covenants will be waived through April 30, 2003 and replaced by covenants requiring free cash flow from operations (EBITDA less capital expenditures) to be at least negative $34 million in the fourth quarter of 2002 and negative $19 million in the first quarter of 2003 and setting a maximum total leverage of $1.275 billion through April 30, 2003 and $660 million after that.

Allegiance had negative free cash flow from operations of $63.5 million in the second quarter of 2002 and negative $41.2 million in the third quarter of 2002.

The $15 million paydown may be increased to $25 million if defaulting lenders fund their pro rata portion of Allegiance's June 20 draw on the loan; it will in either case be applied to the initial amortization of the facility which is scheduled to begin in 2004.

If the paydown is $25 million, Allegiance would have pro forma cash on hand of $305 million as of Nov. 27.

General Electric Capital Corp. is the administrative agent on the facility.

The amendment also fixes the commitment fee at 150 basis points. Previously it ranged from 75 to 150 basis points, reducing as usage increased.

The interest rate is increased to Libor plus 450 basis points. Previously it was set by a grid that ranged from Libor plus 200 basis points to Libor plus 325 basis points.

Allegiance also paid a 25 basis points amendment fee to non-defaulting lenders.

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