Verizon (VZ) - Get Report proved that if you can cut some debt, the market's willing to cut you a break.

The stock jumped 6% Wednesday after the nation's largest local-phone company posted

in-line second-quarter results and offered a sober year-ahead outlook. The company also made a move to reduce its debt burden, though it's clear that the last word has yet to been written on that subject.

Though Verizon continued to see steady declines in its conventional phone business, growth from wireless and long-distance sales helped offset the slide. At the same time, Verizon chipped some $3.3 billion off its industry-leading $62 billion of net debt. That reduction included a $2 billion paydown of commercial paper, a move aimed at calming nervous credit agencies, one of which had recently warned it may downgrade Verizon's credit rating.

Verizon's Wednesday afternoon rally points to investors' need to believe that there may be at least one solid player in an otherwise frail phone industry. With outfits like

WorldCom

and

Qwest

(Q)

making billion-dollar revisions to their financial histories under the bright lights of federal investigations, Wall Street has been selling first and asking questions later.

Continued Shrinkage

Despite dropping 40% over the past year, Verizon stock has nonetheless been viewed by some on Wall Street as a relative safe haven in the heavily sold sector.

Wednesday's news wasn't all good, however. Local phone revenue was down 4% from the same period last year, marking the sixth consecutive quarter for that trend. More importantly, the company's total number of phone lines fell 3% from year-ago levels as more customers switch to competitors or wireless services.

Investors are keen to watch the continued shrinkage in the Bells' line counts -- and not just because it reflects an erosion of a core business. Declines in that category also mark the loss of income from high-margin add-on services such as call waiting. And any services the Bells add in an attempt to replace those declines, like fast Internet access, long distance or wireless, have inferior margins, say analysts.

Preserving Cash

As expected, Verizon also cut its spending to preserve cash. The company has nearly $3 billion in cash and short-term investments and recently negotiated a $7 billion credit line to bolster its liquidity. The company says it will spend about $13.2 billion on capital expenses, a $1.25 billion cut from previous guidance.

The spending plan, coming as it does from the largest networking gear buyer, has been a curiosity to telecom equipment analysts and investors.

Observers note that in the first two quarters, Verizon spent about $1 billion less per quarter than its capex budget would allow. To the gearmaker bulls, this translates to higher spending levels in the second half of this year. But to the bears, this means there are simply two spending plans: The real one suggested by the actual outlays, and the projected plan -- which, as one investor says, is merely a "ploy to show the Street they are cash-flow focused."

Three-Act Ploy

Verizon needs to show creditors and the agencies that it is pinching pennies in these lean telco times, say analysts. The burning issue of the moment in the industry is debt, particularly short-term debt and those bothersome interest payments. Verizon has $17 billion in short-term debt, including nearly $8.5 billion in the commercial paper commitments, which it expects to bring down to $7 billion by the end of the year.

While Verizon has strong credit, it also happens to be in a ravaged sector that has made creditors very defensive, say debt analysts. For obvious reasons, Verizon hopes to avoid a credit downgrade and any chance of getting caught in a debt spiral where interest payments jump up as new financing options start to disappear.

"Overexposure to the commercial paper market has cursed everyone, from

GE

(GE) - Get Report

on the high end to

Tyco

(TYC)

on the low end -- the latter of course leading to bank line drawdowns," says CreditSights analyst Glenn Reynolds. "The agencies are factoring liability structures into their risk profiles, and too much exposure to commercial paper is a negative."

The possibility of a credit downgrade has put pressure on the bond prices. Verizon bonds trade a roughly 3% discount to comparable peers. Verizon bears say that's a number stock investors should keep in mind as they mull over the company's prospects.

"That is a major differential by bond market standards for a high-quality telco name," says Reynolds.