Qwest launches $1.5 billion straight debt, fate of convertible uncertain

By Ronda Fears

Nashville, Tenn., March 7 - Qwest Communications was in the Rule 144A market on Thursday peddling a $1.5 billion 10-year note but convertible market sources were uncertain about the fate of the $1.25 billion of convertible debt the company filed to sell a month ago. Fitch Ratings, however, indicated in a rating action on the new note that the convertible was still under consideration as part of Qwest's balance sheet overhaul.

Qwest did not comment on the convertible, which was part of the company's $2.5 billion shelf filed Feb. 5. It said proceeds from the new notes will be used to refinance short-term debt and maturing long-term debt.

"It will be interesting to see if that plugs the hole that the mandatory was going to," said Jeremy Howard, head of U.S. convertible research at Deutsche Banc Alex. Brown.

Some onlookers thought Qwest might be reluctant to try a convertible while its stock was at a low point.

"I would just think that now with so many companies deleveraging that a mandatory or a convertible preferred would make sense," said Venu Krishna, head of convertible research at Salomon Smith Barney.

"I guess the environment where the stock is perceived to be undervalued would cause an issuer to not want to do a deal, because the terms would have to lean toward the investors."

Qwest is in what chief executive Joseph Nacchio described in a conference call Wednesday as "advanced negotiations" with its major banks regarding terms of a proposed amendment to its $4 billion credit facility, which the company entirely drew down a few weeks ago. That sparked rating downgrades by S&P and Moody's, and then on Wednesday Moody's cut Qwest to one notch above junk plus kept the credit on review for possible further downgrade.

"We see two separate issues here, both deadly serious: liquidity and credit quality. Qwest might be able to buy some time on the liquidity front, but its debt protection measures continue to weaken. Promised asset sales and an equity-linked security issue, if it happens, totaling $2 billion are mere bandages," said Carol Levenson, director of research at Gimme Credit, in a report Wednesday.

"Qwest needs to begin generating meaningful free cash flow to restore its credit quality. You could say a company that needs to restructure its bank loans is by definition of speculative grade credit quality. But good junk is far from bankrupt, or at least it used to be, and the strong local phone company that lies within ought to keep Qwest afloat.

"However, in order to survive, we believe management needs to take more drastic action, slashing capital spending and issuing equity, no matter how dilutive - bankruptcy is a heck of a lot more dilutive. Meanwhile, we don't believe this name has bottomed out."

Fitch rated the new Qwest note at BBB+ and said it will contribute to an improvement in Qwest's near-term liquidity position but additional near-term steps are likely to include the issuance of equity securities or securities with a high equity content as outlined in the Qwest filing last month. Fitch also noted that Qwest has board approval to securitize between $500 million and $1 billion in receivables.

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