McLeodUSA in Pre-packaged Bankruptcy

One of the nation’s largest independent competitive local exchange carriers (CLEC),
McLeodUSA Inc. , has filed a pre-negotiated plan of reorganization through a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the District of Delaware designed to erase $3 billion in debt. Holders McLeodUSA’s existing Class A common stock are expected to retain approximately 17 percent of the shares of the reorganized company’s common stock.

The Chapter 11 case includes only the parent company with none of the McLeodUSA’s operating subsidiaries, which include McLeodUSA Telecommunications, McLeodUSA Publishing and Illinois Consolidated Telephone Company (ICTC), being part of the bankruptcy proceeding.

Following the bankruptcy announcement, the Nasdaq Stock Market said that trading was halted in McLeodUSA stock for “additional information” from the company. The stock closed at 18 cents a share. Trading will remain halted until McLeodUSA has fully satisfied Nasdaq’s request for additional information.

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 Cedar Rapids, Iowa-based 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.

During the bankruptcy proceedings, McLeodUSA expects to operate its business without interruption and with no impact on its employees, customers and suppliers. 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.

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