McLeodUSA files pre-packaged Chapter 11

In the end, neither bondholders nor McLeodUSA can claim the other blinked.

McLeodUSA said it has signed an agreement with the ad hoc committee of holders of its senior notes to support a recapitalization of the company that will include a pre-packaged Chapter 11 filing for its parent company. The company’s operating subsidiaries, including McLeodUSA Telecommunications, McLeodUSA Publishing and Illinois Consolidated Telephone Company, are not part of the bankruptcy.

Under the terms of the deal, bondholders will receive up to $670 million in cash, $175 million of new preferred stock convertible into 15% of the reorganized Company’s common stock, and 5-year warrants to purchase an additional 6% of the common stock for $30 million.

Approved unanimously by the ad hoc committee that holds 23% of the bonds, the deal is very close to the arrangement the company offered to bondholders in December. At the time, the company said it would be getting a $100 million cash infusion from Forstmann Little in exchange for a boost in its ownership level to 45%.

Under the most recent deal, McLeodUSA will wipe out about $3.0 billion of bond debt while Forstmann Little will add an additional $75 million to its December offer for yet another boost in ownership stake. When reorganization is completed, Forstmann Little will own 58% of McLeodUSA.

--Vince Vittore, executive editor