Buy Qwest Corp. bonds, avoid Qwest Capital Funding, credit analysts says

By Peter Heap

New York, Aug. 28 - Gimme Credit analyst Kimberley Noland recommends buying Qwest Corp.'s senior bonds but avoiding Qwest Capital Funding's debt.

In the short term, she expects the closing of the QwestDex sale will prompt "limited bond price appreciation" at all levels of Qwest's capital structure.

But longer term she is more comfortable with Qwest Corp.'s senior bonds.

These securities are covered two times by the asset value of the operating company, based on a four times multiple of EBITDA, Noland said, adding that the asset value would also cover all the remaining debt pro forma for the QwestDex sale.

But for Qwest Capital Funding, the lack of audited financials, ongoing investigations by the Securities and Exchange Commission and the Department of Justice and the difficult competitive landscape for all regional Bell operating companies could create price volatility for its structurally subordinated unsecured bonds - which, she added, have appreciated over 40 points since their lows last year.

Qwest has made "substantial headway" in solving its liquidity problems for this year, Noland said, adding that the efforts have largely been at the expense of the unsecured bonds of its Capital Funding subsidiary, including an exchange and refinancing of bank debt.

But the company will need continued to access to the capital markets to meet maturities of more than $16 billion in 2008, the analyst added, noting that it has only break-even cash flow.

She estimates Qwest will achieve EBITDA of just under $4 billion in 2003, all of which will be needed to fund interest expense and a significantly reduced capital expenditure budget.

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