Analysts more skeptical of Qwest turnaround

By Ronda Fears

Nashville, Tenn., April 19 - After Qwest Communications International Inc. again lowered its financial performance outlook for 2002, analysts are more skeptical about the company's prospects for a turnaround. Some believe the company will bust the more lenient covenants in its new bank facility despite job cuts and asset sales targets that Qwest has outlined.

Qwest "management's credibility continues to be a significant issue here, and we would caution investors that there remains little reason now to have confidence in this team's execution," said Wachovia Securities convertible analysts Jeanine Oburchay and Brian Park in a report Friday.

Standard & Poor's and Fitch both cut their ratings for Qwest to BBB-, moving the credit further away from the company's stated goal of regaining a BBB+ rating and one notch closer to junk territory.

S&P said Qwest's outlook revision was "significantly below" what it was expecting from Qwest, and that it clearly signals tough market conditions. Fitch said it would like to see progress in the company's deleveraging plan, specifically an equity-like issue and asset sales.

Late Thursday, Qwest announced that it will not be able to meet previous 2002 guidance and lowered revenue guidance to $18 billion to $18.4 billion from previous guidance of $19.4 billion to $19.8 billion. The company said EBITDA should now be $6.4 billion to $6.6 billion, down from $7.1 billion to $7.3 billion forecast earlier.

Qwest said it was committed to free cash flow positive by midyear. Thus, capital expenditures were cut to between $3.1 billion and $3.3 billion from $3.7 billion. Qwest also said it would ax another 2.000 employees and was actively seeking bids for its directory service and wireless business.

"Although management believes it will remain in compliance with debt covenants, we believe this revelation puts increased pressure on the credit and that the covenants may prove onerous later in the year," said Wachovia's Oburchay and Park.

Credit analysts are also concerned that Qwest will bust its new covenant terms, which step down from a debt-to-EBITDA ratio of 4.25 times to 4 times in fourth quarter.

"Even with the recent covenant amendment, if operating results decline beyond what the company now anticipates, meeting bank covenants could become a concern," said S&P analysts Richard Siderman and Catherine Cosentino in the rating action.

Chief executive Joe Nacchio indicated the company would also consider selling other assets, such as access lines, or securities. But the prospects for Qwest issuing a convertible appear to have waned considerably over the past month.

"Simple math tells us if debt remains at $25 billion and EBITDA drops to $6.4 billion to $6.6 billion, Qwest's margin for error on its debt/EBITDA covenant ... will be slim or nonexistent, depending on the quarter, said Carol Levenson, director of research at Gimme Credit.

"Obviously management is counting on asset sales and modest free cash flow to reduce debt and maintain a comfortable cushion. We haven't heard the equity-linked securities option mentioned lately. As Qwest's EBITDA outlook continues to dim, asset sales become increasingly vital, although we hate to see a nice, stable unit like the directories business go."

Management would not discuss first-quarter results on the conference call, noting first quarter results will be released on April 30.

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