Qwest (Q) says a small new loan from its lead bank will get it through a short-term cash crunch.

That's fine, say investors, but that short-term cash crunch is far from anyone's greatest worry right now. Yes, Qwest must generate more cash in coming months, either from lenders or through sales of various assets. That remains a constant.

But even after a detailed presentation Thursday, Qwest failed to quiet Wall Street's larger questions about what shape the company will take in coming months as an avalanche of debt-service obligations falls on its Denver headquarters.

Despite promises to set its house in order, Qwest moved no closer Thursday to the kind of financial clarity that investors crave, as the clock continues to tick against the sagging telecom industry. Qwest rose 7 cents Thursday to $1.27.

Lining Up

After posting a $1 billion net loss, turning cash-flow positive thanks to a 75% spending cut and trimming its 2002 financial expectations, Qwest offered assurances about its financing efforts on a conference call with analysts and investors Thursday. Qwest says it will have a $500 million secured credit line available contingent on negotiations with its bankers over a separate restructured credit line with more lenient performance guidelines.

"We believe with the commitment we've received from our lead bank we will have sufficient resources to fund our operations in the near term," said Qwest CEO Richard Notebaert. "And once we restructure our credit facility, we believe cash flow from operations and available debt financing will be sufficient to satisfy our liquidity needs for at least the next 12 months."

But observers note that Qwest can't expect much sympathy from its banks -- after all, the teetering telco hasn't exactly proven to be the most credit worthy borrower of late.

In addition to being the subject of a number of investigations by the Securities and Exchange Commission and the Department of Justice, Qwest last month admitted to accounting "mistakes," including booking as revenue hundreds of millions of dollars of potentially worthless swaps of optical capacity. Qwest says it will restate at least $1.16 billion in sales recorded over the past three years. That figure may grow, and company executives offered no specific time frame for when Qwest planned to restate those numbers.

Qwest irked its creditors earlier in the year by blindsiding them with a somewhat hostile bank withdrawal, say analysts. In February, finding that it was shut out of the commercial paper market, Qwest suddenly drew down its entire $4 billion credit line, putting its bankers on the hook for a company that has increasingly proven to be far more of a credit risk than lenders may have bargained for.

Delays

Those issues certainly could be minimized if Qwest can deliver on its oft-delayed promise to sell its yellow-pages business. But given the summer's delays it now appears increasingly likely that Qwest will be selling the business in pieces. Though executives did not provide any details of the negotiations, Notebaert said: "We anticipate being able to announce something shortly."

The company's previous management had suggested that it could raise as much as $10 billion from the sale of the lucrative directory business. But some analysts scoff at that price, and point out that regulators in four of Qwest's 14 Western states may be asking for a cut of the proceeds to offset future phone rate hikes.

Analysts and investors expect Qwest's Eastern region to sell first for somewhere around $2.5 billion. The Eastern region represents about 40% of the entire Dex business. The estimated total proceeds, should the deals go through, range between $5 billion and $7 billion, according to analysts.

"I would expect $7 billion in total would mark the crossover into panic sale territory," says CreditSights analyst Glenn Reynolds. "They need to get one part of that sale moving or the company is heading for a wall eventually."

But as bond buyer Robert Rock with John Hancock Advisers points out, it would be unwise for Qwest to sell off one of its most valuable businesses before it got through its bank negotiations.

Meanwhile, though the company says it is now cash-flow positive, its total cash position fell by half to $700 million after the company set aside $750 million to cover interest payments. As of June 30, the company's total debt was $26.5 billion.

Additionally, Qwest cut its 2002 cash-flow estimate by $250 million, to $5.5 billion. The company is trying to get the banks to amend its debt covenants so that required cash flow can dip below the current limit of one quarter of total debt. Currently, the company's cash-flow projection puts it in line for a violation, though Qwest stresses it's in compliance now.

And depending on the timing and total of the restatement, Qwest already may be in violation of its 2001 debt covenants.

The company said it would provide more detailed disclosure about the second quarter in an Aug. 19 form 8-K SEC filing but wouldn't be able to file its scheduled 10-Q until some time later, as it continues its internal accounting probe.

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