Moody’s knocks Qwest debt down two notches

Moody’s Investors Service has sent the debt of Qwest Communications deeper into junk territory, lowering the company’s rating two notches to Caa1 from B2.

The move comes as something of a surprise given Qwest’s recent successes toward shoring up its liquidity. Earlier this month the company announced the sale of its directory unit for more than $7 billion and on Tuesday Qwest successfully completed amendments to its bank facility and secured a new credit line. Both were seen as major steps in the company’s effort to avoid default on its debt.

In lowering Qwest’s rating, Moody’s acknowledged these events as positive. However, it downgraded the RBOC because the structure of the modified and new bank facilities makes Qwest’s public debt subordinate to these credit lines. Also, Moody’s is concerned that Qwest may face difficulty generating enough cash to service its debt load beyond 2004, even with the directory unit sale factored in.

All of Qwest’s ratings, Moody’s said, remain under review for further downgrades. This review will focus on liquidity; the SEC and Department of Justice investigations into the company; operating performance; and debt deleveraging.

A spokesman for Qwest said the company was “very surprised by the action taken by Moody’s, especially given our recent announcements that strengthen our balance sheet. ... We’ve addressed the majority of their previous concerns.”

The recent moves the company has taken, he said, gives Qwest enough funding for the next several years and basically eliminates any liquidity concerns.

Qwest stock was down 12 cents to $3.08 in late afternoon trading.