S&P Downgrades XO's Debt Rating

Communications Today, Nov 12, 2001

Credit rating agency Standard & Poor's on Thursday downgraded telecom services provider XO Communications' [XOXO] debt rating, citing the company's "weakened liquidity" and its "inability" to give 2001 fourth quarter guidance.

S&P said the company's cash balance, which was about $1 billion at the end of September, "only funds the company's current business plan into the second half of 2002." The credit rating agency also said XO's use of about $290 million of that amount to repurchase bonds and preferred stock in the open market has "accelerated the funding gap time frame."

Attempts by Communications Today on Friday to reach XO officials were unsuccessful.

The most significant problem currently facing XO is its balance sheet, which carried about $7.7 billion in long-term debt and preferred stock at the end of the last quarter and which will claim about $400 million of the company's cash in interest payments next year. To reduce that debt, XO repurchased $547.3 million worth of its senior notes and spent about $290 million in cash to liquidate $472.6 million of its preferred stock during the quarter.

Last Thursday, XO posted a third-quarter loss of $50.8 million, or 12 cents per share, compared to a net loss of $394.1 million, or $1.20 per share, a year ago.

The company said third-quarter revenues increased to $331.5 million from $224.3 million a year ago. It took a $189.1 million restructuring charge for the quarter related to consolidation and the write-off of inventory and property.

XO officials warned last week of serious uncertainty in the coming quarters because of the weak economy and the effects from the Sept. 11 terrorist attacks in New York and Washington, D.C.

Ken Hoexter, an analyst with Merrill Lynch Global Securities, told Communications Today on Friday that XO is running out of options.

"I don't want to say that [the credit downgrade] is another nail in [XO's] coffin, but it signals that something else has to happen for them to survive," Hoexter said. "I think they are running to the limit of where they have to consider a major restructuring as virtually their only course of action."

-- Rodney L. Pringle, rpringle@pbimedia.com >TK Verizon Communications [VZ]: