Qwest Slides After Debt Downgrade - TheStreet

Qwest (Q) is finding that all the talk in the world about asset sales and debt reduction isn't swaying bond watchers.

Citing weakness in the economy, a staggering telecom industry and a host of problems specific to Qwest, ratings agency Standard & Poor's cut the debt-heavy telco to junk status Wednesday, warning that future cuts are possible.

The move comes less than two weeks after a similar action reduced long-distance giant

WorldCom

(WCOM)

to junk status, raising worries of a cash squeeze and setting off a massive selloff in the onetime highflier's already battered stock. Ratings downgrades make borrowing more costly and can hurt companies in other ways too, sometimes pushing them out of compliance with debt covenants and scaring away investors who focus on blue-chip securities.

After finishing the regular trading session unchanged at $5.03, Qwest shares slid 38 cents, or 7.6%, after hours to $4.65 as investors anticipated a nasty Thursday morning for the big telco.

Financing concerns have long plagued Qwest, whose shares are more than 80% below their 52-week high amid an industrywide cash squeeze. The company was once a favorite of investors who wanted to play the Internet building boom while milking the U S West cash cow. But in the past year, the company's financials have deteriorated sharply and the

Securities and Exchange Commission

has begun probing the company's accounting practices.

The downgrade won't help Qwest win any more friends among investors. The company has $26 billion in debt; it faces $800 million in loan payments coming due in July and a further $300 million due by year-end. The Denver telco has been trying to unload its high-margin yellow pages business, QwestDex, in recent weeks. Even so, a sale of the business -- which brings in $1.5 billion in annual revenue -- may not be settled soon enough to please creditors, who needless to say will want cash now. Qwest has pledged to swing its operations into the black during the second quarter, but that won't be enough to satisfy demanding investors, either.

S&P lowered Qwest's credit rating one notch to BB-plus from BBB-minus, the lowest investment grade status. In a statement, S&P said that the uncertainties that continue to hang over the company may prove difficult to overcome.

"Certain key external factors could constrain the company's ability to restore investor confidence and re-establish management credibility, including a series of pending shareholder lawsuits and an SEC investigation of several accounting practices," said S&P analyst Catherine Cosentino in a statement.