Updated from 5:24 p.m. EST

The liquidity squeeze at Qwest ( Q) got stickier Thursday afternoon.

After the market closed Thursday, Qwest said it had drawn down its entire $4 billion bank credit line, confirming market talk that it had essentially been shut out of the commercial paper market that big companies use for cheap short-term funding. Qwest also said it was exploring refinancing options and that it still expected to turn cash-flow positive in the second quarter.

Qwest discussed the issues on a postclose conference call because the company is "not going to let rumors and innuendo drive the value of this company," CEO Joe Nacchio told listeners. The company expects to hold similar update calls each week for the next few weeks, as it tries to "settle down the market." During the call Qwest said it expected it wouldn't have to restate revenue and named some assets it might consider selling to raise cash.

The drawdown announcement came after the debt-heavy Denver telco saw its shares slide 13% in regular trading amid mounting questions about accounting and liquidity. The slide marked the fifth-straight daily decline for the company and put its stock at a 52-week low. Qwest dropped $1.10 to $7.49 Thursday.

Qwest's selloff ensued after TheStreet.com reported investors were taking another look at a deal with Enron , and Reuters reported Qwest drew down $1 billion in bank credit after being shut out of the CP market.

Ahead of the postclose announcement, rating agency Standard & Poor's cut Qwest's long-term corporate credit rating by a notch; smaller rival Fitch followed suit after the close. Both companies retain investment-grade ratings on Qwest. S&P said its outlook is negative, suggesting further cuts are possible. Ratings cuts squeeze liquidity by raising borrowing costs.

Backing Up for a Second

Qwest's Enron deal involved a purchase of telecom assets whose value may have to be adjusted in the wake of the industrywide spending slump, observers said. With other media reports raising questions about Qwest's accounting for other deals and with regulators probing the books at Global Crossing, the Enron report renewed worries that Qwest's books may face further scrutiny. Qwest has said its accounting is proper.

Among the concerns in light of the Global Crossing investigation is that telcos like Qwest may be forced to restate their revenues and account for network capacity swaps separately. CFO Robin R. Szeliga said she was confident that Qwest booked sales and purchases of network capacity with other carriers in a legitimate manner. "I have no reason to believe the SEC would cause us to restate our revenues," said Szeliga on the call.

Meanwhile, liquidity has become an equally pressing concern among Qwest investors in recent weeks. Qwest is saddled with some $25 billion in debt, and with earnings and cash flow coming under pressure during the recession, some investors think the company will have to issue massive amounts of stock to raise cash. TheStreet.com's Peter Eavis has predicted the company would need to sell as much as $3 billion in stock to keep its credit ratings intact; the company recently said it would sell as much as $1.25 billion.

The liquidity worries are prompted by concerns about Qwest's weakening profitability. Qwest has some $4 billion in bank credit lines outstanding, and the terms call for the company to maintain a debt-to- EBITDA ratio of 3.75. But the company recently trimmed 2002 cash-flow forecasts to the low end of its previous targets; if Qwest runs afoul of those covenants, it could face steeper problems in raising needed funds.

(In a notable sidelight to the Qwest credit line situation, the company's lead bankers are Banc of America Securities and J.P. Morgan Securities. J.P. Morgan Chase ( JPM) shares have been rocked in recent days amid worries about the company's exposure to questionable credits. The Qwest credit line has been syndicated, however, meaning many lenders hold small pieces of it.)

Some observers point out that Qwest has talked in the past of other ways of raising cash if need be, namely through the sale of assets. Though Qwest had been mum on those alternatives of late, largely to avoid the appearances of a fire sale, it could fetch some big cash if it sold certain businesses.

Nacchio listed a few of the Qwest properties that may be sold. Those pieces included rural phone lines, wireless phone systems and the yellow page directory service either in pieces or whole.

Point of Interest

Thomas Weisel Partners analyst Peter DeCaprio says the market may be alarmist at this point. "Qwest could simply be using shrewd business judgment if it found interest rates too steep in the commercial paper market," says DeCaprio, who has an attractive rating on Qwest. Weisel has no underwriting ties to the telco.

"It's just stupid to suggest that they don't have some financing flexibility at this point," says DeCaprio.

Still, the concerns remain and there appears to be no painless way to bolster liquidity as revenue continues to slide. If Qwest elects to draw money from its bank credit, it may face higher interest rates; commercial paper is generally the cheapest method of raising money for big companies, but the market has grown choppier in the wake of the Enron saga. Meanwhile, if Qwest sells cash-generating assets it will face further reductions in its cash flow, renewing questions about the debt covenants.

In attempting to end the conference call on a confident note, Nacchio promised: "We have no other unusual deals. What you'll see is what you get."

Judging by the stock slide of late, investors may already have seen enough.

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