S&P lowers Qwest to junk

In a move that surprised many in the industry, Standard & Poor’s yesterday downgraded the debt of Qwest Communications to junk status.

In moving Qwest down one notch to BB+ from BBB-, S&P said overall economic weakness and competitive threats would put pressure on the company’s near-term and longer-term financial and operating performance. In addition, external factors such as shareholder lawsuits and the SEC investigation into Qwest’s accounting practices could distract management’s attention from core operations, S&P said.

While the company is working to shore up its balance sheet, S&P’s downgrade assumes that Qwest’s sale of its director business will gross about $8 billion, an oft-cited figure that almost certainly assumes the sale of the entire unit. If the company should only sell parts of its directory arm and fall short the $8 billion figure, “then [Qwest] could be subject for a credit adjustment,” said Richard Siderman, an analyst with S&P’s corporate Telecommunications & Cable Ratings Team.

Despite Qwest’s recent troubles, the downgrade seemed to catch the company and analysts by surprise. It comes slightly more than one month after S&P last cut Qwest’s rating and is not based on any new information.

“I’m a bit surprised and disappointed by the shifting criteria that I seem to be witnessing,” said Qwest CEO Joe Nacchio during a conference call. “I recognize we’re in a super-conservative environment and people have to form their own judgment. It doesn’t necessarily make those judgments correct…We see nothing that should have prompted that action.”

On an S&P-hosted call to discuss the downgrade, many analysts expressed the same sentiment, saying that the ratings agency was not being consistent in what they were asking from Qwest and in how they judged Qwest relative to other companies.

Whether consistent or not though, the downgrade does bring into effect certain financial covenants relating to roughly $1 billion of debt issued by classic Qwest. A five to one debt-to-EBITDA requirement is now activated, as well as a two to one equity to debt covenant. According to Nacchio, the company does not anticipate bumping up against either.