By Paul Deckelman
New York - Qwest Communications International Inc. announced Wednesday that the company is offering to purchase up to $2.25 billion face amount of its own outstanding bonds and those of its wholly owned subsidiaries Qwest Capital Funding, Inc. and Qwest Services Corp.
The tender offers are the latest effort at debt reduction by the Denver-based telecommunications company, which outlined its efforts to clean up its balance sheet and expand its customer base - particularly in areas outside of its traditional local phone service business - on a conference call with analysts and investors following the release of its third-quarter results.
Qwest said it was offering to purchase, in cash, up to $625 million aggregate principal amount of notes issued by the three companies that mature in 2005 through 2007, up to $1.3 billion of notes maturing in 2008 through 2011, and up to $325 million of notes maturing in 2014 through 2031.
(See table 1 for details of the offer)
Qwest set an early participation payment deadline of 5 p.m. ET on Dec. 4, so that holders tendering their notes by that deadline will receive the $20 per $1,000 principal amount early participation payment as part of the total consideration, should their notes be accepted for purchase. The offers will expire at midnight ET on Dec. 19, with both deadlines subject to possible extension. Holders tendering their notes after the early participation payment deadline but before the expiration deadline will receive the tender offer consideration, but not the early participation payment.
All noteholders whose validly tendered notes which are accepted for purchase under the tender offer will also receive accrued interest up to, but not including, the settlement date.
The tender offers for the respective series of notes are subject to the satisfaction or waiver of certain conditions, but are not subject to the receipt of any minimum amount of tenders.
The maximum amount of notes which Qwest is willing to purchase in each of the three classes of maturities into which it has divided its tender offers is in each case less than the total amount of outstanding notes in the respective grouping.
In the event that the offers for any of the three classes of maturities are oversubscribed, tenders of notes within that class will be subject to pro ration. Qwest and the subsidiaries will accept tendered notes of each series within the applicable class of maturities according to the order of priority specified for that series in the attached table. Therefore, all tendered notes of a higher priority within a class will be accepted before any tendered notes of a lower priority within that same class are accepted. For a particular series of notes that has some, but not all, tendered notes accepted, all tenders of notes of that series will be accepted on a pro rata basis, according to the principal amount tendered.
In connection with the notes issued by parent Qwest Communications International or by Qwest Services Corp. (although not on any notes issued by Qwest Capital Funding), the company is soliciting consents to eliminate substantially all of the restrictive covenants in the notes' indentures. Holders may not tender those notes without also delivering consents, and may not deliver consents without also tendering the notes. No additional consent payment will be made under the offers.
None of the tender offers are conditioned on obtaining any minimum amount of consents. The consents with respect to any series of Qwest Communications International or Qwest Services Corp. notes will be effective only if tenders for notes representing a majority in principal amount of that series are accepted for purchase and no pro ration occurs with respect to that series.
Qwest's vice president and chief financial officer, Oren G. Schaffer, said during the conference call, in answer to an analyst's query about whether the company had gotten the consent of Qwest Services Corp.'s bank lenders for massive proposed bond buyback, said that "we've been on the telephone with them," and the company anticipates having the matter wrapped up "well before the end of the tender period."
Asked whether the lenders might put a price-tag on their consent for the tender, Schaffer replied "so far, our bank lenders have been very helpful in the regard that these waivers have not been priced and obviously, we would be happy if our lender group would continue its support in this fashion."
Qwest advised bondholders that Banc of America Securities LLC (call High Yield Special Products unit toll-free at 888 292-0070 or collect at 704 388-4813) and Goldman, Sachs & Co. (call Credit Liability Management Group at 212 902-4419 or toll-free at 800 828-3182) are the joint lead dealer-managers for the offers, while Lehman Brothers Inc. is the co-dealer-manager. Documentation can be obtained from the information agent, Global Bondholder Services Corp. (866 873-6300 or collect at 212 430-3774.
In announcing its third-quarter results, Qwest said that during the third quarter ended Sept. 30, it reduced its total debt by $1.2 billion, which was achieved through payments on its credit facility to reduce the balance to $1.25 billion from $1.57 billion, and the repayment in full of the $750 million term loan associated with its former QwestDex telephone directory publishing unit; the two-stage Dex sale, which began last year, was completed on Sept. 9, with second-phase gross proceeds of $4.3 billion, from which the term loan was repaid.
The company said that it also reduced debt by $106 million through private debt-for-equity transactions and cash repurchases.
Qwest said that assuming the tender offers are completed successfully, it will save more than $100 million annually in net interest expense, and will have reduced its total debt by over $7 billion since the end of the third quarter of 2002.
Qwest said that year-to-date, as of Nov. 19, it has reduced the principal amount of its short-term and long-term borrowings by approximately $1.4 billion through debt payments (net of debt issuances), private exchange transactions and cash repurchases, which yielded a net debt reduction of some $600 million. These private transactions included debt- for-stock exchanges of approximately $247 million of Qwest Capital Funding bonds for 52 million shares. The company has also exchanged $560 million of Qwest Capital Funding bonds for $406 million of new Qwest Services Corp. notes and recorded an unamortized premium of $144 million.
Those debt reductions come on top of the $1.9 billion in debt reduction which Qwest achieved last year via a controversial debt-for-debt exchange, with some bondholders charging that the company had essentially crammed what they called a "coercive" and "inadequate" offer down their throats. Their efforts to stop the debt swap in court ended in failure.
Including that highly contested debt swap, Schaffer said that since the third-quarter of 2002, Qwest had reduced its total debt by $4.9 billion, while at the same time increasing cash by $5 billion.
"We've made tremendous progress in our plan [to strengthen the balance sheet] that we set out to do in third-quarter 2002," Schaffer said. The three-part plan includes asset sales, such as the Dex transaction, which brought in a total of $7.05 billion of proceeds in two stages; reducing debt through a variety of strategic financing transactions; and improving internal cash flow by trimming operating expenses, capital expenses and working capital.
Qwest said that cash and cash equivalents increased during the quarter by some $3.3 billion, to $6.1 billion. For the nine months ended September 30, 2003, Qwest generated cash from operations of $1.9 billion and incurred capital expenditures of $1.5 billion.
Schaffer said that while Qwest expects fourth-quarter capex to be above the current run-rate, it still sees opportunities to bring it in below the previously announced $2.5 billion outlook. He also anticipates positive free cash flow from continuing operations in 2003.
Third-quarter EBITDA was $540 million, with an EBITDA margin of 26%.
Qwest reported net income for the third quarter - including the proceeds from the Dex sale and revenues from some discontinued operations - of $1.831 billion, or $1.05 per fully diluted share, versus the year-earlier loss of $123 million, or seven cents a share
Operating income declined to a loss of $523 million from income of $76 million in the 2002 third quarter; the company said the swing into the red on an operating basis was primarily due to a pretax charges of $393 million connected with Qwest's having terminated unfavorable contract arrangements with fiber-optic network provider Calpoint LLC and another vendor, and a $230 million impairment charge that reflects the anticipated decrease in usage of Qwest's wireless network as a result of its new wholesale wireless arrangement with Sprint Corp.
Qwest chief executive officer Richard C. Notebaert said during the conference call that his company had faced a "challenging" and "crowded, fiercely competitive" market environment during the quarter, which also saw overall company revenues decline 5.4% year-over-year to $3.57 billion.
Qwest blamed the decline in revenues on competitive pressures in its traditional local phone services business in 14 Western U.S. states and in its wireless services business; these were offset, at least partially, by growth in data and long-distance services within the local service territory.
Notebaert said, for instance, that long-distance had grown by 572,000 access lines during the quarter, to 1.7 million total, and touted the fact that Qwest had begun using its own network to carry long- distance traffic within its local service territory rather than having to buy space on other providers' network, which the CEO said would likely save the company as much as $15 million a month going forward. Once it got the OK to do so, Qwest immediately began selling advanced business-class services to mid-market and large companies.
Qwest also said that it had increased its in-region DSL customer base to 577,000, which represents a subscriber growth of 41,000 lines, or 7.6%, from the previous quarter.
"I expect broadband growth to continue," Notebaert said. "There's potential for a lot of upside in DSL."
Schaffer, while noting the revenue decline, also asserted that "despite the competitive pressures, the quarter did provide some evidence that the rate of revenue decline has stabilized. In fact, we are seeing positive signs in some very key areas," such as data and Internet protocol services for business customers, which the Qwest executive said "gained traction."
With such trends, plus the gains in long-distance and the sale of advanced business-class services to in-region enterprise customers," and company efforts to boost sales in long-distance, DSL, wireless and video services, "we are comfortable that we have the opportunity to achieve positive top-line growth in '04," Schaffer said.
Qwest's accounting practices have, in the past, been the subject of considerable scrutiny by the Securities and Exchange Commission and other regulators - but Schaffer declared that instead of having to say the company is "substantially complete" with its promised restatements of past earnings results, "we can actually state now that we have completed that task."
He said that Qwest's restated 2000 and 2001 financials were included in its 2002 10-K annual report filing with the SEC, which he called "a significant accomplishment." He said that Qwest would be filing its 10-Q for the just-ended 2003 third quarter by the end of the day, with the 2003 first- and second-quarter 10-Qs to be filed "as soon as possible - and we are looking forward to remaining on a regular reporting cycle."
Table 1: Details of Qwest's tender offer
| Issuer | Security | Amount | Priority | Tender | Early | Total
|
| outstanding | level | Payment | Payment | Payment
|
|
|
| Offer for notes maturing in 2005 through 2007. Maximum tender amount: $625 million
|
|
|
| QCF | 6¼% notes due 2005 | $358.86 million | 1 | $990.00 | $20.00 | $1,1010.00
|
| QCF | 7¾% notes due 2006 | $829.613 million | 2 | $1,007.50 | $20.00 | $1,027.50
|
| QSC | 13% notes due 2007 | $558.559 million | 3 | $1,142.50 | $20.00 | $1,162.50
|
|
|
| Offer for notes maturing in 2008 through 2011. Maximum tender amount: $1.3 billion
|
|
|
| QCF | 6 | 3/8% notes due 2008 | $245.378 million | 1 | $925.00 | $20.00 | $945.00
|
| QCII | 7¼% senior notes due 2008 | $300 million | 2 | $1,000.00 | $20.00 | $1,020.00
|
| QCII | 7½% senior notes due 2008 | $750 million | 3 | $1,010.00 | $20.00 | $1,030.00
|
| QCF | 7% notes due 2009 | $733.796 million | 4 | $935.00 | $20.00 | $955.00
|
| QCF | 7.90% notes due 2010 | $667.447 million | 5 | $960.00 | $20.00 | $980.00
|
| QCF | 7¼% notes due 2011 | $922.796 million | 6 | $935.00 | $20.00 | $955.00
|
| QSC | 13½% notes due 2010 | $2.504456 billion | 7 | $1,165.00 | $20.00 | $1,185.00
|
|
|
| Offer for notes maturing in 2014 through 2031. Maximum tender amount: $325 million
|
|
|
| QCF | 6½% debentures due 2018 | $250.373 million | 1 | $795.00 | $20.00 | $815.00
|
| QCF | 7 | 5/8% notes due 2021 | $230.678 million | 2 | $860.00 | $20.00 | $880.00
|
| QCF | 6 | 7/8% debentures due 2028 | $765.85 million | 3 | $795.00 | $20.00 | $815.00
|
| QCF | 7¾% notes due 2031 | $718.694 million | 4 | $860.00 | $20.00 | $880.00
|
| QSC | 14% notes due 2014 | $640.879 million | 5 | $1,215.00 | $20.00 | $1,235.00
|
|
|
| QCF is Qwest Capital Funding
|
| QSC is Qwest Services Corp.
|
| QCII is Qwest Communications International Inc.
|
| Prices are per $1,000 principal amount
|
|
|
|
|
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