As Williams Communications ( WCG) races headlong toward restructuring, new-era broadband rivals Level3 ( LVLT) and Broadwing ( BRW) are struggling to find their own remedies to the industry's deep distress.

Williams, the operator of the nation's third-largest fiber optic network, said Monday that it was talking with bankers about restructuring its finances through means that could include Chapter 11 bankruptcy protection. As of September, Williams had nearly $1 billion available in a credit line, but the company apparently was unable to satisfy debt covenants to access that cash. Investors in debt-laden telecom outfits typically require debtors to meet certain performance criteria before they will lend more cash.

The question of debt covenants came to the forefront at rival Level3 as well Monday. The company wasted no time in charting its own course, bolstering revenue streams through a seemingly noncore acquisition. The struggling telco signed an $89 million cash deal Monday to acquire CorpSoft, a closely held Norwood, Mass., business software provider with $1.1 billion in annual revenue. The deal, which is expected to close next month, will nearly double Level3's revenue. Level3 shares jumped 60 cents to $3.05.

Compliance

Not only will CorpSoft greatly improve Level3's sales outlook -- albeit with services other than the sale of communications bandwidth -- it buys the telco some bargaining power with creditors. As it turns out, Level3 has access to $650 million in credit, as long as the company satisfies one major requirement of its lenders: maintaining a minimum quarterly revenue rate.


Splendid Splinter?
Williams unit since spinoff


"This deal makes a lot of sense for them," says CIBC World Markets' analyst Tim Horan, who has a hold rating on Level3. CIBC has no underwriting ties to Level3. "Their old business model wasn't working. Now they will have more leverage when they negotiate with their creditors."

The CorpSoft deal will help the company "remain in compliance with the terms and conditions of our credit facility until the second half of 2003," said Level3 CFO Sureel Choksi in a press release. The company hastens to point out that the acquisition fits the definitions set out in its debt covenants, even if software sales strike some observers as a bit off the beaten path for a bandwidth seller.

Seasoned Wall Street observers say they know when revenues are being bought, and this deal has all the markings. Is Level3 on the level about the deal?

"That question presumes we did something sneaky, but what we have is a contract between Level3 and a set of banks," said a company spokesman. "As the management team we are paid to live up to everything that's been agreed to. Were revenues a consideration? Yes. Was it the only consideration? No."

But anything goes nowadays in the telecom sector, considering the carnage that has littered the landscape in recent months. With the collapse of Global Crossing, McLeodUSA, 360Networks and Mpower Communication, and the teetering of Williams, XO and Metromedia Fiber, the clock is ticking extra loud for the few outfits still standing, such as Level3 and Broadwing.

For its part, Broadwing saw its outlook turn even gloomier Monday when Moody's cut the company's credit rating, which was already below investment grade, by another two notches. The agency cited concerns that the telco faces greater-than-expected challenges in a difficult market.

Broadwing comprises Cincinnati Bell's local phone service and a national fiber optic long distance network. Broadwing has posted two consecutive quarters of declining broadband revenues, a bad sign given the amount of cash the company invested in its fiber optic network.

Not only are credit ratings and liquidity pressures mounting, but Level3 and Broadwing also stand to face an even more competitive market should Williams wipe its debt slate clean and continue operation with lower overall costs.

"This will end up putting more price pressure on Level3," says CIBC's Horan, whose firm has a hold rating on Williams Communications and Broadwing.

Weak Fundamentals?

But all the arm-flapping aside, collapse is almost inevitable for the post-1996 class of phone upstarts, says Friedman Billings & Ramsey analyst Susan Kalla.

"The next generation carriers that were created between 1997 and 2000 are now finding that they are too leveraged to get more funding," Kalla says. "The problem wasn't just that there were too many other competitors but they spent all their money upfront, and they don't have enough time to make the business work." Kalla has no rating on any of the telcos, and Friedman Billings has no underwriting ties to these companies.

Level3 has about $5 billion in debt, with interest expenses running roughly at $450 million this year. Prior to the CorpSoft acquisition, Level3 was expected to burn through $700 million in cash this year on $1.7 billion in revenue, by CIBC Horan's estimates.

The company says it will pull out of the red ink sometime in 2004 but promises to adjust that outlook in April during earnings.

But Kalla says without the software revenues, Level3 had about one or two quarters worth of cash left after expenses. Kalla says that Level3 needs to fill its network traffic levels to about 70% to begin to making money, but by her estimates the company is running at about 30% of capacity at best.

A Level3 spokesman said the ratio of traffic to capacity is "too dynamic" to be used as a good measure of network efficiency.

To be sure, as these ambitious telcos abandon or retool their original business models, we will see continued pressure on other weak players and even less money flow to the equipment suppliers like Cisco, Lucent and Nortel.