Advice to Qwest ( Q): Don't play chicken with the bond market.

The hard-hit telco said last week that it would consider issuing equity and selling assets to raise money, which would allow the company to protect its credit rating and pay down debt. A Detox column soon after estimated that the company would need to issue more than $3 billion in equity to keep its credit rating. But Qwest insisted Tuesday that it won't have to raise anywhere near that amount. The Denver-based company said it "currently expects that it will issue no more than $1.25 billion" in equity or equitylike securities. Qwest shares, 75% off their 52-week high, added 38 cents Tuesday, to $9.34.

But ultimately just a billion in stock sales will be far too little to comfort holders of Qwest's debt. At a time when high-spending companies' creditworthiness is being closely scrutinized, creditors have far more influence over Qwest's future than stock investors. This harsh new reality seems to have escaped Qwest CEO Joseph Nacchio. When asked Tuesday why he wasn't issuing more stock, Nacchio replied: "We want to balance the concerns of all our investors." He added that it would be tough on equity holders to issue stock at the current price.

Problem is, this sort of talk will make it only harder for Qwest to access the debt markets, on which the company is still hugely reliant. The company told this column last week that it expects to refinance (i.e., replace by issuing new debt) some $2 billion to $2.5 billion of the $3.2 billion of commercial paper, or short-term debt, which comes due this year. That leaves $700 million of CP and $1.2 billion of other debt that needs to be paid back in 2002. Proceeds from asset sales, details of which have yet to come out, and from the equity issue can probably take care of that $1.9 billion.

But if liquidity concerns grow around Qwest, it might find issuing $2 billion to $2.5 billion of CP very tough. Of course, like Tyco ( TYC) on Monday and Dynegy last year , Qwest could tap the credit line that acts as a backstop to its CP program.

But accessing this $4 billion line, so far undrawn, would be perceived negatively, as Tyco's stock slump Monday and Tuesday shows. On Tuesday, Qwest said it was in routine talks to renew this line, which comes due in May. Even if it isn't renewed -- a possibility when high-profile defaults are chewing up banks' balance sheets and mangling their reputations -- Qwest has the right to extend this credit by one year.

To be sure, if it is faced with lower-than-expected cash flows from its operations, Qwest can sell more assets and further slash its 2002 capital spending from the current $4 billion -- something Nacchio said Tuesday he was willing to do if cash targets are missed.

However, the big risk is that Nacchio, out of some sort of misplaced loyalty to his corporate origins, sells off cash-producing assets but refuses to sell off the old Qwest business, which is made up of cash-consumptive broadband operations. Two years ago, Nacchio took the original Qwest into its merger with the Old Economy local phone company U S West, a cash cow, to form the current Qwest. Management always declines to break out just how the old Qwest operations are performing, but a look at the sorry state of Level 3 ( LVLT), a very similar company, offers a chilling possibility.

If, as might be justified, we assume that the old Qwest is worth nothing, any stock value must be based on the old U S West, with its 18 million access (telephone) lines. Those could be valued at $2,000 each, giving a rough asset value of $36 billion. Subtracting total debt of about $27 billion (including off balance sheet leases) leaves equity of $9 billion, or $5.40 a share.

Qwest is worth more than that only if it can show it's doing everything to please the debt market. It isn't doing that right now -- so consider that the downside for this already battered stock.
Know any companies that the market may be misvaluing? Detox would like to hear about them. Please send all feedback to peavis@thestreet.com.

In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

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