McLeodUSA reaches agreement with bondholders after sweetening offer, files Chapter 11

New York, Jan. 31 - McLeodUSA Inc. said it reached an agreement with bondholders over the recapitalization of the company after sweetening its offer. To implement the plan, McLeodUSA filed for Chapter 11 bankruptcy protection.

The Cedar Rapids, Iowa competitive local exchange carrier said it signed lock-up agreements with the ad hoc committee of investors owning 23% of the company's notes.

Under terms of the deal, bondholders will receive up to $670 million in cash, $175 million of new preferred stock convertible into 15% of the reorganized company's common stock, and 5-year warrants to purchase an additional 6% of the common stock for $30 million.

Previously McLeodUSA had been offering at least $560 million in cash plus 14% of the recapitalized company's common stock. But earlier this month, the company said holders of $956.185 million principal amount of its senior notes told the company they would not accept that plan, which required support of at least 95% of the holders of its $2.9 billion of senior notes.

McLeodUSA also said Thursday it has signed lock-up and support agreements with stockholders holding approximately 45% of its series A, series D and series E preferred shares, including funds managed by Forstmann Little & Co., to support the recapitalization plan.

The prepackaged Chapter 11 filing is in the United States Bankruptcy Court for the District of Delaware. Secured lenders, Forstmann Little, the bondholders' ad hoc committee and certain preferred stockholders supported the filing, McLeod said. Only the parent company is covered by the filing.

The $670 million in cash to be paid to holders of the senior notes will be funded by $570 million of the $600 million proceeds to be received from McLeodUSA's previously announced sale of its directory publishing business to Yell Group and $100 million in cash from a new equity investment of $175 million by Forstmann Little.

The $175 million of new convertible preferred stock to be issued to bondholders will convert into common stock representing 15% of McLeodUSA's equity and carry a cumulative dividend of 2.5%. The warrants to buy 6% of the stock for $30 million will run for five years.

Forstmann Little's equity investment is increased to $175 million from $100 million and the firm will receive 23% of the reorganized McLeodUSA common stock and five-year warrants to buy a further 6% of the common stock for $30 million.

Forstmann Little's series D and series E preferred stock will be converted into common stock, representing approximately 35% of the reorganized McLeodUSA common stock. In total, Forstmann Little will have a 58% stake in the company.

McLeodUSA's series A preferred stock will be converted into 10% of the reorganized company's common stock.

Holders of the existing class A common stock are expected to retain 17% of the shares of the reorganized McLeodUSA.

McLeodUSA said it had $140 million in cash at the date of the filing and will not need debtor-in-possession financing.

The company intends to eliminate $425 million of bank debt by reducing its current revolving credit facility commitment by $140 million, paying down its term loan by $60 million using $35 million from the Forstmann Little investment and $25 million from the directory publishing proceeds, and offering for sale its regulated subsidiary Illinois Consolidated Telephone Co. with up to $225 million of the proceeds being used to pay down term loans.

A commitment for a $110 million exit financing facility has been arranged by lenders led by JPMorgan, Bank of America and Citibank, McLeodUSA said. The revolving facility could be increased to $160 million.

McLeodUSA expects to emerge from bankruptcy in the second quarter of this year.

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