Qwest Communications International Inc.'s plan to refinance $12.9 billion in debt is running into resistance from a group of bondholders who plan to hire a lawyer in an effort to force the financially struggling local telephone company to sweeten the deal.
Sources said bondholders plan to interview five law firms on Monday before picking one to represent them in the negotiations or in possible legal action against Qwest, the dominant local telephone provider in 14 western states.
Earlier this week Qwest announced a plan to exchange $12.9 billion of its debt for new bonds worth $4 billion. The notes would pay higher interest rates and would have longer maturities. For instance, a bond that pays about 5.9 percent interest and is due to be paid off in 2004 would be exchanged for a bond paying 13 percent, payable in 2007.
In addition, holders of the new notes would move to the front of the line of debtors to be paid in case of a Qwest bankruptcy, according to Cory Jackson, a bond analyst with U.S. Bancorp Piper Jaffray Inc. Qwest's debt, which was already trading at the junk bond level, was cut four more notches this week, to "CC" from "B-," by Standard & Poor's Corp., the credit-rating agency. S&P cut Qwest's rating in part because a planned sale of its telephone-directory business may not close until 2004.
Jackson said bondholders will be pressuring Qwest to add stock options to the deal. The proposal, if accepted, would reduce the chance of the company filing for bankruptcy and thereby increase the value of Qwest stock. Bondholders argue that the deal should include an opportunity for them to benefit from any increase in the stock price. Qwest shares fell less than 2 cents yesterday, or less than 1 percent, to $4.62.
Qwest is eager to reduce its debt to conserve cash. The Denver-based company is struggling under $24 billion in debt. It is also under investigation by the Justice Department and the Securities and Exchange Commission, which are looking into allegations of improper accounting.