A big bond swap has Qwest (Q) riding the light again, but this is a refinancing with a dark side.

In offering to swap new debt for some $12.9 billion in existing bonds, cash-strapped Qwest will buy itself some breathing room as bills come due in coming months. The company said just last week that even after a series of asset sales it remained in danger of running out of cash as it confronted a mess of future debt obligations. With Denver-based Qwest forestalling further talk of insolvency, the stock jumped 22% Wednesday, adding 86 cents to $4.76.

But as is always the case nowadays in the eroding telecom industry, the good news came at a price. Some investors were saying that the new setup could cost Qwest at least $50 million in added annual interest costs. That's because unlike the refinancings many homeowners are undertaking nowadays, Qwest is actually taking on substantially higher interest rates in exchange for longer loans and smaller principal amounts outstanding.

Conservation Movement

The doddering Denver-based local phone giant is seeking to persuade creditors to tear up the old bonds and take new bonds that mature five to 12 years from now. While the debt exchange will get Qwest some much needed room to conserve cash on maturing debt repayments, the new bonds carry interest rates between 13% and 14% -- nearly double the old rates.

Analysts say that if Qwest is successful in selling the new bonds, the higher interest rates could boost interest expense by between $50 million and $130 million annually. Qwest declined to comment.

But at least the new arrangement keeps the Qwest recovery going. For bondholders, the decision to accept the swap is really a matter of at least getting some money rather than none at all, says New Jersey state employee's pension fund manager Bill Trent, who has a small position in Qwest.

"They had to do something, and the current bondholders weren't confident that they would get paid," says Trent. "So they chose a more realistic security, which also keeps Qwest alive."

Beast of Burden

The bond swap is the second major move by Qwest to mend its broken financial structure. In August, Qwest

agreed to sell its yellow page business in two parts for $7 billion to help pay off some lenders and stay afloat.

While the first half of the deal was completed earlier this month, the remaining $4 billion portion of the sale is expected to take much longer. And even if Qwest can claim all the proceeds, the company has said may still have insufficient cash.

Qwest's debt load has been made even more burdensome by the declines in the company's core local phone business. Revenues from residential phone service fell 9% last quarter from the prior year. In fact, minus the healthy and profitable Qwest Dex directory business, Qwest's future performance

looks rather gloomy, unless the economy suddenly rebounds.

Qwest is also under several civil and criminal investigations into its business and accounting practices. Among the issues that has drawn the attention of regulators is Qwest network capacity swapping business. These questionable exchanges, like the

11th-hour deal with Enron on the last day of the third quarter last year, made little sense from an operations standpoint, but contributed richly to finances, people familiar with the deal have said.

The company has already restated $1.5 billion in revenues recorded between 2000 and 2001. The bulk of those revenues were tied to the booking of network capacity sales.

Creditors were all too aware of how risky a client Qwest had become, and rather than take a huge loss with a Chapter 11 restructuring, investors and analysts say that the bondholders wisely decided to play along with this refinancing deal.

"To take a page out of Blazing Saddles," says CreditSights analyst Glenn Reynolds, "they just rode into town, held a gun to their heads and said 'Drop your principal or the issuer gets it!'"

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