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McLeodUSA: Business as Usual

McLeodUSA Inc. , a Cedar Rapids, Iowa-based competitive local-exchange carrier (CLEC), said that a Delaware bankruptcy court has granted all of its "first-day motions" for it to continue business as usual as it reorganizes under Chapter 11 of federal bankruptcy laws.

The latest action follows the company's filing last Thursday of Chapter 11 papers with the court. As previously announced, the Chapter 11 filing includes only the parent company of McLeodUSA Inc., and does not extend to any of the operating subsidiaries, including McLeodUSA Telecommunications, McLeodUSA Publishing, Illinois Consolidated Telephone Company and McLeodUSA Purchasing LLC.

The first-day orders allow the parent company to also conduct business as usual relative to all of its customers, employees and suppliers and to maintain its existing cash management systems, company officials said. These orders authorize payment of pre-petition employee wages, salaries, business expenses and employee benefits; and interim use of cash collateral to pay suppliers for goods and services and otherwise operate its business. The company can also pay all of the claims of its unsecured creditors, except its bondholders, in the ordinary course of its business.

The court also set Feb. 28 as the date for the hearing to approve the parent company's disclosure statement, and April 5 as the date for the confirmation hearing for the parent company's reorganization plan. It is expected that the plan, if approved, could be implemented in April 2002, McLeodUSA officials said in a statement.

McLeodUSA has been informed by the advisors to the ad hoc committee of the bondholders, that holders representing a total of approximately $1.2 billion of bonds, or 40% of the outstanding bonds, have expressed support for the reorganization plan that was negotiated with the ad hoc committee last week. Included in the $1.2 billion are bondholders representing approximately $690 million, or 23%, who have signed lock-up or support agreements to vote in favor of the transaction.

In addition, McLeodUSA has signed lock-up or support agreements for a favorable vote from 45% of its preferred stockholders.

McLeodUSA last Thursday filed for bankruptcy in the wake of $3 billion in red it had been riding. Under the terms of the recapitalization, McLeodUSA bondholders will receive up to $670 million in cash, $175 million of new preferred stock convertible into 15 percent of the reorganized company's common stock, and five-year warrants to purchase an additional 6 percent of the common stock for $30 million. An ad hoc committee of senior note holders, which holds 23 percent of the company's bonds, voted unanimously in favor of the plan.

Additionally, the company has signed lock-up and support agreements with stockholders holding approximately 45 percent of its Preferred Series A, Series D and Series E shares, including funds managed by Forstmann Little & Co., to support the recapitalization plan. Forstmann Little will be the largest shareholder of the reorganized McLeodUSA after the recapitalization with an approximate 58 percent stake in the company.

Theodore J. Forstmann, senior partner of Forstmann Little, will continue as chairman of the Executive Committee of the McLeodUSA Board of Directors.

The pre-negotiated elements of the transaction provide for no disruption to the company's employees, trade creditors, customers and overall operations.

The company has approximately $140 million in cash currently available as of the date of the filing and has secured a commitment for a $110 million exit financing facility from a group of lenders arranged by JPMorgan, Bank of America and Citibank.

This exit financing may be increased to as much as $160 million and will be available to McLeodUSA at the completion of the recapitalization subject to customary conditions. Accordingly, based on such cash availability, the company does not require and does not expect to obtain debtor-in-possession financing.

McLeodUSA provides integrated communications services, including local services, in 25 Midwest, Southwest, Northwest and Rocky Mountain states.

McLeod USA added that it has received notification of early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 for the previously announced sale of McLeodUSA Publishing Company to Yell Group.

Roy Mark, managing editor of dc.internet.com, contributed to this story.