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ComputerWire: IT Industry Intelligence

A group of New York bankers will decide next week whether to give Qwest Communications International Inc a financial lifeline or leave the debt-laden carrier, at the center of a revenue recognition scandal, to slide into bankruptcy.

After recording a second-quarter loss of $1.1bn, and forecasting that revenue this year will drop by around 12% to $17.1bn to $17.4bn, Qwest is trying to persuade its bankers to give it more time to repay its credit facility and relax the covenants governing its loans.

With $26.5bn in debt, it paid a crippling $866m in interest charges in the first half of this year alone. CEO Richard Notebaert is optimistic the bankers will play ball and the company insists that it currently complies with its financial covenants.

"Once we restructure our credit facility, we believe that cash flow from operations and available debt financing will be sufficient to satisfy our liquidity needs for at least the next 12 months," he said.

Immediate relief for its balance sheet will come with the sale of its QwestDex directories subsidiary, for which it expects to receive up to $10bn. The sale has been delayed by the SEC investigation and QwestDex was also caught up in the revenue recognition problems. But Notebaert insists that he will be able to announce something about the sale "shortly".

Qwest's figures hardly give optimism about its future, though the loss was inflated by a $740m write-down of its remaining investment in KPNQwest, bad debt reserves of $119m related to the WorldCom bankruptcy and $59m for asset impairment on real estate held for sale.

In the second quarter to June 30, the net loss was $1.1bn, down from a loss of $3.3bn on revenue of $4.3bn, down from $5.2bn; at the mid-term stage the loss is $1.8bn, down from a loss of $3.3bn on revenue of $8.6bn, down from $10.3bn.

As if an SEC probe, and the prospect of having to restate revenue for the past three years were not enough, Denver, Colorado-based Qwest has to grapple with the impact of economic problems.

On business services, even if $69m of optical capacity asset and IP equipment sales were excluded from the 2001 figures, revenue still declined by 2.4% to $1.55bn in the quarter as growth of 8% in data and internet services revenue could not offset a fall of 8% in voice revenue.

Consumer services fell by 4.8% to $1.41bn and wireless services only increased 4%, or $7m.

But the big problem area was wholesale services where revenue crashed 41.4% to $995m. The main reason for the slump is the disappearance of sales of optical capacity assets and IP equipment. Even taking out the $566m these items "contributed" to last year's figures, and which are likely to vanish in the restatement, the revenue decline was still 12%.

More misery lies ahead. Apart from the $1.16bn likely to be restated, Qwest is in discussions with its auditors about a goodwill impairment charge and it is also likely to write-down the value of certain network assets.

© ComputerWire

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