NEW YORK-McLeod Inc. is expected to sell publicly $200 million in debt by early March, some of which will be used to build out the 26 personal communications services licenses it won in the recent Federal Communications Commission D- and E-block auctions.
Salomon Brothers Inc., New York, is lead underwriter for the issue of 10-year senior notes. The issue carries a call provision that prevents McLeod from redeeming the notes, or buying them back from investors, for at least five years. The notes also are to be issued with a five-year discount period, and are expected to pay cash interest starting in 2002.
Additionally, the public note sale will permit McLeod to obtain up to $100 million in senior secured bank financing and $150 million in secured accounts receivable sales and vendor financing for equipment purchases, according to Moody’s Investors Service Inc., New York. Moody’s assigned a speculative grade rating of B3 to the debt issue, and accorded a “positive outlook” to it.
A competitive local exchange carrier headquartered in Cedar Rapids, Iowa, McLeod has the advantage of heavyweight owners. Two investor-owned utilities, IES Industries of Cedar Rapids and MidAmerican Energy Holdings of Des Moines, Iowa, together own a 30 percent stake in McLeod.
“These are very important strategic partners because one of the most expensive aspects of building out a system is getting rights-of-way,” said Eric Goldstein, senior analyst for Moody’s speculative grade ratings group.
In the franchise areas of these two electric power companies, McLeod will get the benefit of free rights-of-way for its fiber-optic network and for buildout of its PCS tower sites. The CLEC licenses cover a population of 6.9 million in 24 markets.
“The last series of auctions gave the smart players opportunities to find good holes in coverage, and this will give them some leverage,” Goldstein said. “McLeod will definitely negotiate with strategic partners. A lot of the big providers in that territory have a big hole in their coverage.”
Based on the outcome of those negotiations with major players, McLeod “will back into a technology,” he said.
McLeod, which began operations in 1992, offers bundled telecommunications services mostly to small- and medium-sized businesses, primarily in Iowa and Illinois. It has begun providing retail phone service and plans to expand commercial and residential services to several Midwest and Rocky Mountain states over the next few years.
Moody’s B3 rating “reflects the risks associated with the company’s short operating history, [the] expectation that positive cash flow is at least a [few] years away … the challenges McLeod faces in building sufficient market share to eventually operate profitably … [and] eventual competition [it] will face longer term from larger companies with greater capital resources and market brand awareness.”
However, Moody’s also said that McLeod “has an experienced senior management team, a sound business plan, key strategic relationships, strong asset valuations relative to indebtedness and a strong equity capital position.”
