Balky bondholders organizing to oppose Qwest debt swap deal

By Paul Deckelman

New York, Nov. 21 - Qwest Communications International is hoping to lure holders of its Qwest Capital Funding Inc subsidiary to participate in its massive debt-exchange offer by holding out the prospect of higher coupons and a more senior place in the company's capital structure. But at least some bondholders are not buying it, and are trying to organize an effort to stop the deal - or to at least get the troubled telecommunications company to sweeten the terms of the offering.

That was the upshot of a lengthy conference call Thursday afternoon organized by Jefferies & Co., whose assessment of the Qwest offer is that Qwest's equity investors will get all of the upside that the deal provides to the company - while the bondholders will just get a haircut.

"From our perspective, the proposal totally benefits the common stock and the company and is not that much of a benefit to the bondholders except that it may deal with some of the near-term liquidity issues that we are all aware of," declared Jefferies managing director Bill Derrough on the conference call.

And even this benefit - Qwest managing to avoid a liquidity crunch by convincing the holders of debt coming due within the next few years to extend their maturities - may turn out to be less than the company hopes for (a point noted by Standard & Poor's on Wednesday when it cut Qwest's ratings several notches).

The Jefferies official said that his firm had talked to a number of bondholders who indicated that they were leaning toward exchanging some of the longer maturity paper being exchanged for (2018, 2021, 2028 and 2031) for the new 2014 notes, while holding onto their near-term maturity bonds. "If everybody takes that position," Derrough cautioned, "that will not eliminate some of those near-term liquidity issues."

He said "they're not offering any real upside to the bondholders in exchange for walking away from over $2 billion of claims" represented by the steep discount at which some of the existing bonds will be exchanged. Traditionally in restructuring situations, he added, "if you're asked to give up face amount, you get something in exchange for that." Since Qwest is not so flush with cash that it can give the bondholders money on the barrelhead, that means equity - which Qwest is offering none of.

Qwest said Wednesday that it would exchange up to $4 billion face amount of new senior subordinated secured notes of its Qwest Services Corp. subsidiary and an as yet undetermined amount of new Qwest Communications paper for up to $12,902,653,000 aggregate principal amount of outstanding Qwest Capital Funding securities via a private placement exchange transaction that will expire on Dec. 20, subject to possible extension.

While the new notes being offered will carry coupons ranging from 13% to 14% - and all of the current debt being exchanged for has coupons of 7.9% or below - and will be secured by junior liens on certain Qwest collateral and will rank higher in the capital structure than the existing notes and closer to the company's core operating assets, Qwest is asking participating noteholders to exchange their notes at a discount to the par value ranging anywhere from 17.5% to 49.75%, and in the case of most of the notes being exchanged for to lengthen the maturities by as much as three years.

Jefferies telecom equity analyst Rick Klugman noted that company management has stock options that kick in at the $5 level - so "that's an incentive for them" not to dilute the stock's current value by issuing new stock to the bondholders in exchange for their concessions.

"Bondholders are being asked to give up a ton of value in this transaction," asserted Jefferies high-yield telecom analyst Romeo Reyes, who said that in addition to being asked to give Qwest more flexibility when it comes to maturities, "bondholders are being asked to take a massive haircut, depending on the issue, of between 18 and 46 cents [on the dollar] per bond.

Based on the company's economic fundamentals, and employing a complicated formula of dividing the pro forma amount of debt that will be left after the completion of the sale of its QwestDex telephone directory unit, Reyes said the Qwest Capital Funding bonds being taken out in this exchange are worth par value, "which is why I don't think that you guys [the bondholders] should be giving up the $6 billion or $7 billion of value that you are being asked to give up." The exchange offer, he added is "a unilateral deal that the company and the investment bankers are trying to cram down investors' throats without any input from the bondholders."

Bondholders, said Derrough, "have got to organize themselves, and have got to stick together. There's strength in numbers, and the moment that certain large bondholders start peeling off and playing along with the exchange offer, it's going to destroy the cohesion of the bondholder group, and everybody might as well then take the deal on the table."

Derrough said that Qwest was already pursuing a "divide and conquer" strategy by setting no minimum tender amount for the bond offer, but setting out a maximum amount of the more valuable Qwest Services Corp. debt it will issue, "first come first served (the rest of the existing bonds will be exchanged for new debt of the parent holding company, considered less valuable because it is one more level removed from the operating company assets). They're trying to create a stampede of people so that nobody wants to get left behind."

Bondholders skeptical of the announced terms or dissatisfied appear to be already taking Derrough's advice, holding a pair of conference calls of their own earlier Thursday at which they discussed their concerns and attempted to set up an ad hoc steering committee that would be able to approach the company claiming to represent a sizable portion of the debtholders as it demanded equity or some other improvement in the terms.

Joel Klein of Chicago-based investment firm PPM America, noted on the call that there are what he called an "unwieldy" number, "hundreds" of smaller holders - those having less than $200 million of the bonds - who have expressed interest in organizing to try to push Qwest into sweetening the terms, something which observers close to the Denver-based telecommer believe it has no intention of doing, at least yet. For the moment, the bondholder group will consist of the larger holders - those with over $200 million of the bonds.

Klein said that even putting the smaller holders aside for the moment, there are still more than 25 holders of $200 million of Qwest debt or more - still something of clumsy number as the bondholders try to get themselves together.

Qwest spokesmen were not reachable for comment late Thursday on the incipient bondholder revolt.

The Qwest debt exchange deal is being lead-managed by UBS Warburg, Merrill Lynch & Co. and Bank of America, with Wachovia Securities, Inc., Credit Suisse First Boston and Lehman Brothers included among the co-managers.

"We have never seen so many co-lead managers or co-managers on an exchange before, said Derrough, who remarked that that the long roster was reminiscent of the tactic employed by buyout king Henry Kravis of Kohlberg Kravis Roberts some years back when he was buying out what became RJR Nabisco and hired four investment banking firms on the deal.

"[Kravis] did it not because he needed four firms' advice - he did it to prevent some of those firms from working for somebody else. We don't know the reasons behind the large collection of co-managers, but the cynics' view could be that it was partly an attempt by [Qwest] and its advisors to keep people out of the game who might otherwise be in a position . . . to encourage bondholders not to do this deal."

He said that "a reduced amount of desk analysts" would now be willing to talk about the deal "because people are restricted now - and they have an incentive to see the deal get done."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.