MCLD - McLeod USA, Inc. (MCLD)

[jmhollen]

Hold McLeodUSA, XO bonds - JP Morgan

NEW YORK, July 9 — Investors should still hold the bonds of McLeodUSA Inc. (NASDAQ:MCLD) and XO Communications Inc. (NASDAQ:XOXO) even though Moody's Investors Service downgraded the bonds last week, J.P. Morgan said in a report dated Friday.

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Both companies are among the many upstart telecommunications providers that compete with regional Bell operating companies. Many of these sprouted after the U.S. Congress passed the Telecommunications Act of 1996 to encourage competition with the Baby Bells.

Moody's last Tuesday cut Cedar Rapids, Iowa-based McLeodUSA's senior unsecured debt to "B3," its sixth highest junk grade, from "B1." with a negative outlook.

It said it is now unlikely McLeodUSA will have a 5-to-1 debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio by 2003, and that McLeodUSA may not improve EBITDA enough to meet its intermediate funding needs.


On the same day, Moody's cut Reston, Virginia-based XO's senior unsecured debt to "Caa1," its seventh highest junk grade, from "B2," with a negative outlook.

Moody's said XO is funded into the first half of 2003, but needs about $750 million of more funding to become cash flow positive. The public markets are closed to XO, it said, and there is no assurance that equity sponsors Craig McCaw or Forstmann Little will provide more support.

McLeodUSA's 8.125 percent senior notes maturing in 2009 were recently offered at 51 cents on the dollar, while XO's 10.75 percent senior notes maturing in 2009 were recently offered at 31 cents on the dollar.

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