McLeod vows to exit Chapter 11 in January

McLeodUSA gained approval of its reorganization plan Thursday from a federal bankruptcy court and plans to emerge from Chapter 11 protection in January 2006.

In the plan, all of the company's existing common and preferred stock will be cancelled without recovery for shareholders. McLeod's $677.3 million in secured junior bank debt will be converted into 100% of the company's equity, and its $100 million in secured senior bank debt will be cancelled and replaced with a new $100-million term loan.

In addition, the company was given access to up to $50 million in debtor-in-possession (DIP) financing to fund daily business operations through Chapter 11. When the company's reorganization is complete, that DIP financing will be replaced with a new $50 million revolving credit facility.

In a release issued today, the company said it expects no disruption from the reorganization to its employees, customers or suppliers. McLeod's Chief Restructuring Officer Stan Springel, who essentially replaced the company's CEO this summer, said, "As we emerge from Chapter 11, we will be able to put an even greater focus on strengthening our sales, operational and financial performance."

In November regulatory filings, the company said it may sell its ATS cable and telephony business--which provides video service in Cedar Rapids and Marion, Iowa--to raise cash during restructuring. It is also selling its Cedar Rapids headquarters building for $27 million with plans to lease alternative office space. During the third quarter, the company sold two aircraft and some fiber assets for $16.4 million, slightly more than the amount of restructuring charges the company incurred that quarter from legal and financial advice and severance costs.

This is the second time the competitive local exchange carrier has reorganized under Chapter 11. The company emerged from bankruptcy in April 2002 with a plan to improve its customer experience, shed unnecessary costs and infrastructure, improve the quality of its network and grow revenue. But, for a broad variety of reasons, revenue has been declining ever since. In the nine-month period ending Sept. 30, 2005, for example, McLeod reported $474.6 million in revenue, a 14% decrease from the same period in 2004.

Earlier this year, the company sought partners or acquirers as an exit strategy, earning multiple forbearance agreements from lenders in order to continue the search. But in July the company concluded that a buyer could not be found. In August, its chief executive and financial officers resigned. And in October, McLeod's lenders approved its reorganization plan.

"New revenue growth…continues to be a challenge as the company competes against large, financially strong competitors with well-known brands," McLeod wrote in its most recent quarterly earnings filing. "Large telecommunications providers will likely become even more aggressive upon the closing of the pending…mergers of AT&T with SBC and MCI with Verizon and anticipated additional consolidation in the telecommunications industry, further challenging the company's ability to grow revenue."