| Credit Crunching |
Nothing's easy for Qwest ( Q) nowadays, whether it's the credit market or the audience on its conference calls. Offering its second weekly update of funding and operational issues, Qwest said its cash burn is slowing and that it has had some success in attracting high-margin data customers. But investors continued to fret about the debt-heavy company's liquidity as talks continue with lenders over the terms of a $4 billion loan. The company didn't predict when it might reach agreement with its bankers. But CFO Robin Szeliga said on a conference call with investors and analysts Friday: "I'm confident we will reach a mutually agreeable situation with our bank facility."
The negotiations are anxious for investors because Qwest drew down the credit last week after being shut out of the market for short-term, low-cost commercial paper funding. Qwest called the negotiation of the credit facility its top priority, and CEO Joe Nacchio noted that the company would end up paying a higher interest rate. That will no doubt show up as a drag on earnings, making this stage of Qwest's financial triage all the more painful. As industry observers point out, the collapse of Enron and Global Crossing have put the banks on the defensive. Now the banks want more in return for their loans, and cash-strapped telcos like Qwest are seeing their already difficult negotiating position weaken further, say analysts. In fact, with Qwest's sales and earnings picture still gloomy, and cash-raising efforts such as the sale of business units still on the drawing board, lenders aren't eagerly serving up the loans the way they did in an earlier era. "The banks have had a number of loans blow up in their faces, and now they want to limit their risks," says Robertson Stephens analyst Jim Friedland. "What was previously a virtuous cycle has now become a vicious cycle." Friedland has a market perform rating on Qwest, and Robertson Stephens has no underwriting ties to Qwest. Qwest shares dropped 53 cents, or 6%, to $7.90 Friday in the wake of the conference call. In an attempt to fan confidence in the company's prospects, CEO Nacchio told analysts and investors on the call that Qwest has somewhat slowed the flow of red ink. He said negative cash flow would be between $300 million and $400 million for the first quarter. Earlier guidance called for negative cash flow of $500 million. Nacchio also trumpeted the success of Qwest's 2-cent-per-minute promotional calling plan for business customers. He said the offer yielded 50 new contracts, of which 19 were new customers. The majority of those businesses signed on for data services. Qwest gets higher profit margins from data services. Qwest also suggested it can cut back on equipment spending even further if need be to better adjust costs to sales. Among the areas Qwest suggested it could plunge the budget knife was wireless network expansion. This could be bad news for Lucent, the primary wireless infrastructure supplier to Qwest, according to research by SG Cowen analysts. Wireless is also one of the businesses that Qwest says it could sell, in addition to some of its rural network properties and its yellow pages operations. Nacchio said Qwest has been working with investment bankers to expedite the sales of some of these assets, but gave no indication of when these sales may materialize. Observers say the possible sale of these assets would sacrifice future cash flows, though selling any of these operations wouldn't necessarily compromise the core business. Of course, one of the problems of needing to sell businesses is that buyers can be ruthless. "They're certainly not going to be selling these assets at a premium, but it's also not going to go at rock-bottom prices either," says Robertson's Friedland. "They are in a situation where they no longer have the luxury of being able to hold on to these assets."