FORBEARANCE AGREEMENT

 

 

                                                                  Exhibit 10.1

 

 

                             FORBEARANCE AGREEMENT

 

 

         FORBEARANCE AGREEMENT, dated as of March 16, 2005 (this "Agreement"),

among (1) McLeodUSA Incorporated, a Delaware corporation (the "Borrower"), (2)

each of the Subsidiaries of the Borrower listed on Schedule I hereto (the

"Subsidiary Guarantors"), (3) the financial institutions named on the

signature pages hereto (together with their respective successors and assigns,

the "Participant Lenders") and (4) JPMorgan Chase Bank, N.A., as agent for the

Lenders (the "Administrative Agent").

 

                                  WITNESSETH:

 

         A. WHEREAS, the Borrower, certain Participant Lenders, the

Administrative Agent and certain other financial institutions are parties to a

Credit Agreement dated as of May 31, 2000 (as amended, the "2000 Credit

Agreement");

 

         B. WHEREAS, the Borrower, certain Participant Lenders, the

Administrative Agent and certain other financial institutions are parties to a

Credit Agreement dated as of April 16, 2002 (as amended, the "2002 Credit

Agreement," together with the 2000 Credit Agreement, the "Credit Agreements");

 

         C. WHEREAS, the Subsidiary Guarantors and JPMorgan Chase Bank, N.A.,

as Collateral Agent for the Secured Parties, are parties to a Subsidiary

Guarantee Agreement dated as of May 31, 2000, as amended and restated as of

April 16, 2002 (the "Guarantee Agreement");

 

         D. WHEREAS, the Borrower and the Subsidiary Guarantors have (i)

advised the Participant Lenders they intend to retain as an officer of the

Borrower a person reasonably acceptable to the Participant Lenders with the

requisite expertise and scope of duties to validate and provide information

regarding the Borrower and its Subsidiaries to the Lenders, prospective buyers

and other parties, and to assist the Borrower in developing strategies

relating to any restructuring or other strategic transactions (the

"Restructuring Officer") and (ii) proposed a restructuring plan that is under

discussion with the Participant Lenders (as such plan may be modified, the

"Plan");

 

         E. WHEREAS, the Borrower has advised the Administrative Agent and the

Lenders that the Specified Defaults (as defined in section 1(b) below),

including, without limitation, the failure to make scheduled amortization

payments under the Credit Agreements and interest payments under the 2000

Credit Agreement, will be occurring during the Forbearance Period (as defined

in section 1(a) below); and

 

         F. WHEREAS, in order to permit completion of the negotiation of the

Plan and exploration of other possible strategic transactions, the Borrower

and the Subsidiary Guarantors have asked the Participant Lenders, and the

Participant Lenders are willing, to forbear from exercising certain

default-related remedies against the Borrower and the Subsidiary Guarantors on

account of the Specified Defaults for a limited period of time and upon the

terms and conditions set forth herein.

 

         NOW, THEREFORE, in consideration of the foregoing, the covenants and

conditions contained herein and other good and valuable consideration, the

receipt and sufficiency of which are hereby acknowledged, the parties hereto

agree as follows:

 

         Section 1. Defined Terms. Unless otherwise specifically defined

herein, each term used herein which is defined in the Credit Agreements has

the meaning assigned to such term in the Credit Agreements. As used in this

Agreement, the following terms have the meanings specified below:

 

         (a) "Forbearance Period" means the period beginning on the date

hereof and ending on the earliest to occur of (any such occurrence being a

"Termination Event"):

 

                  (i) May 23, 2005;

 

                  (ii) the occurrence of any Event of Default other than a

         Specified Default;

 

                  (iii) any holder of Indebtedness or other obligations of $7

         million or more of the Borrower or any of its Subsidiaries shall take

         any action to collect or enforce any claim or to create or enforce

         any lien against the Borrower or any of its Subsidiaries, excluding

         the making of a demand or the assertion of a claim by a vendor or

         customer that is disputed in good faith by the Borrower or such

         Subsidiary in the ordinary course of business and with respect to

         which such vendor or customer has not obtained a lien or otherwise

         obtained the ability to collect or enforce such claim; and

 

                  (iv) a breach of any term, condition or representation

         contained in this Agreement by the Borrower or the Subsidiary

         Guarantors.

 

         (b) "Specified Defaults" means existing or anticipated Events of

Default, as listed in Schedule II hereto.

 

         Section 2. Acknowledgements and Undertakings.

 

         (a) The Borrower and the Subsidiary Guarantors agree and acknowledge

that the Specified Defaults will occur during the Forbearance Period and that

certain of the Specified Defaults will constitute material Events of Default.

 

         (b) In addition to the information required to be furnished under the

Loan Documents to the Administrative Agent and the Lenders (and without

prejudice to sections 5.01 or any other provision of the Credit Agreements),

the Borrower shall, as promptly as practicable, provide to the Administrative

Agent any information reasonably requested by the Administrative Agent or the

Lenders. Without limiting the generality of the foregoing, the Borrower shall

promptly provide to the Administrative Agent, in a form acceptable to the

Administrative Agent,

 

                  (i) on Tuesday of each week, a detailed forecast of receipts

         and disbursements for the Borrower and the Subsidiary Guarantors

         providing, on a weekly basis, the Borrower's good faith estimate of

         projected receipts and disbursements for the 13 weeks commencing with

         the immediately following week, together with a reconciliation of

         such forecast against the forecast delivered the previous week and a

         reasonably detailed explanation of any variance between the current

         forecast and such previously delivered forecast;

 

                  (ii) not later than the tenth day following the end of each

         calendar month, an operational report, including management's good

         faith estimate of receipts and disbursements for such month, the cash

         balances of the Borrower and Subsidiary Guarantors as of the end of

         such calendar month, and an analysis of performance against projected

         performance as set forth in the phased business plan dated March 9,

         2005 previously delivered to the Participant Lenders;

 

                  (iii) on request of the Administrative Agent, and in any

         event on Monday of each week, a written update addressed to the

         financial advisor of the Administrative Agent regarding the status of

         the Borrower's efforts to sell all or any portion of its business,

         including, without limitation, a list of all contacts made with

         potential purchasers (including the identities of those contacted and

         the dates of such contacts), copies (if in writing) or descriptions

         (if not in writing) of any proposals, offers or indications of

         interest received by the Borrower or its attorneys or financial

         advisors, and any responses thereto by the Borrower or any such

         attorney or financial advisor; and

 

                  (iv) direct access to the officers and employees, and books

         and records of the Borrower and its Subsidiaries (including the

         Restructuring Officer retained by the Borrower) to obtain such

         information as the Participant Lenders deem reasonably necessary to

         evaluate, negotiate and implement any restructuring plan and to

         verify and analyze to the reasonable satisfaction of the Participant

         Lenders the matters referred to in subparagraphs (i), (ii) and (iii)

         above.

 

         (c) As promptly as possible, and, in any event, not later than March

31, 2005, the Borrower shall retain (and identify to the Administrative Agent)

the Restructuring Officer. The scope of the Restructuring Officer's engagement

shall be reasonably acceptable to the Participant Lenders. From and after such

retention, the Restructuring Officer shall continue to be actively employed by

the Borrower at all times during the Forbearance Period and shall have direct

access to all information, personnel and other resources necessary to the

performance of his or her duties.

 

         (d) The Borrower shall make all scheduled interest payments under the

2002 Credit Agreement at the non-default contract rate.

 

         (e) On or prior to the Forbearance Effective Date (as defined in

section 12 below), the Borrower shall pay to the Administrative Agent an

advance of $1.5 million (the "Advance") on account of the Borrower's

obligations to pay expenses and other amounts under sections 9.03 of the

Credit Agreements. The Administrative Agent shall be entitled to pay such

amounts as they come due, including, without limitation, (i) the reasonable

fees and expenses of counsel and financial advisors provided for in such

sections and (ii) travel and other incidental expenses of Lenders actively

participating with the Administrative Agent in restructuring discussions with

the Borrower. The Borrower shall from time to time make further advances to

the Administrative Agent, upon demand (and in any event within three business

days), to restore the balance of the Advance held by the Administrative Agent

to $1.5 million.

 

         (f) The Borrower shall furnish to the Administrative Agent prompt

written notice of the occurrence of a Termination Event.

 

         (g) The Borrower and the Subsidiary Guarantors acknowledge and agree

that, under the Credit Agreements, as amended, they are not currently entitled

to request any new Loans or Letters of Credit.

 

         Section 3. Forbearance.

 

         (a) The Participant Lenders agree that until the expiration of the

Forbearance Period, the Participant Lenders will temporarily forbear (subject

to the terms hereof) from the exercise of their default-related remedies under

the Credit Agreements, Loan Documents or otherwise, against the Borrower and

the Subsidiary Guarantors solely to the extent the availability of such

remedies arises exclusively from the Specified Defaults; provided that the

Borrower and the Subsidiary Guarantors shall comply during the Forbearance

Period with all provisions, limitations, restrictions or prohibitions that

would otherwise be effective or applicable under any of the Loan Documents

during the continuance of any Default or Event of Default; provided further

that the agreement of the Participant Lenders temporarily to forbear shall not

apply to nor preclude any remedy available to the Administrative Agent or the

Lenders in connection with any proceeding commenced under any bankruptcy or

insolvency law, including without limitation, to any relief in respect of

adequate protection or relief from any stay imposed under such law.

 

         (b) Upon a Termination Event, the agreement of the Participant

Lenders hereunder to forbear from exercising their default-related remedies

shall immediately terminate without the requirement of any demand,

presentment, protest or notice of any kind, all of which the Borrower and the

Subsidiary Guarantors hereby waive. The Borrower and the Subsidiary Guarantors

agree that the Administrative Agent and the Lenders may at any time thereafter

proceed to exercise any and all of their respective rights and remedies under

any or all of the Loan Documents and/or applicable law, including, without

limitation, their respective rights and remedies in connection with any or all

of the Defaults and Events of Default, including, without limitation, the

Specified Defaults.

 

         (c) For the avoidance of doubt, nothing herein limits the right of

the Administrative Agent or the Lenders, including during the Forbearance

Period, to take any action to preserve or exercise rights or remedies against

parties other than the Borrower and the Subsidiary Guarantors ("Third Party

Rights"). For purposes of the foregoing, the Borrower and the Subsidiary

Guarantors acknowledge and agree that execution and delivery of this Agreement

shall constitute the making of any necessary demand or the giving of any

necessary notice for purposes of preserving and/or permitting the exercise of

any such Third Party Rights of the Administrative Agent and the Lenders.

 

         (d) Execution of this Agreement constitutes a direction by the

Participant Lenders that the Administrative Agent act in accordance with its

terms. Each Participant Lender agrees that, notwithstanding anything to the

contrary in the Credit Agreements, the Administrative Agent shall not be

required to act if directed against the Borrower or the Subsidiary Guarantors

if such action is contrary to the terms of this Agreement.

 

         (e) The Borrower and the Subsidiary Guarantors acknowledge and agree

that the agreement of the Participant Lenders hereunder to forbear from

exercising their default-related remedies with respect to the Specified

Defaults shall not constitute a waiver of such Specified Defaults and that the

Lenders expressly reserve all rights and remedies that the Administrative

Agent and the Lenders now or may in the future have under any or all of the

Loan Documents and/or applicable law in connection with all Defaults and

Events of Default (including without limitation the Specified Defaults).

 

         Section 4. Interest Rate During the Forbearance Period.

 

         (a) The parties acknowledge that upon the occurrence of an Event of

Default, the Lenders have the right to accelerate the due date of the Loans

under the Credit Agreements. In consideration of the forbearance provided

hereunder, and notwithstanding any failure to accelerate the due date of the

Loans, from and after the occurrence of any Event of Default (including any

Specified Defaults), principal of and interest on the Loans and all fees and

other amounts payable by the Borrower shall bear interest at the default rate,

as set forth in sections 2.13(c) of the Credit Agreements.

 

         (b) Notwithstanding the foregoing, the Participant Lenders are hereby

advised that, during the Forbearance Period (i) the Borrower does not intend

to pay interest in cash on a current basis under the 2000 Credit Agreement,

and (ii) the Borrower intends to pay interest in cash under the 2002 Credit

Agreement only at the pre-default rate.

 

         (c) Any interest accrued under the Credit Agreements that has not

been paid in cash shall compound on each Interest Payment Date until paid.

 

         Section 5. Reference to and Effect upon the Credit Agreements.

 

         (a) Except as expressly set forth herein, all terms, conditions,

covenants, representations and warranties contained in the Credit Agreements,

and any other Loan Document, and all rights of the Administrative Agent and

the Lenders and all obligations of the Borrower and the Subsidiary Guarantors

thereunder, shall remain in full force and effect. The Borrower and the

Subsidiary Guarantors hereby confirm that the Credit Agreements, and the other

Loan Documents are in full force and effect.

 

         (b) Except as expressly provided herein, nothing contained in this

Agreement and no action by, or inaction on the part of, any Lender or the

Administrative Agent shall, or shall be deemed to, directly or indirectly (i)

constitute a consent to or waiver of any past, present or future violations of

any provisions of the Credit Agreements, or any other Loan Document, (ii)

amend, modify or operate as a waiver of any provision of the Credit

Agreements, or any other Loan Document, except as expressly set forth herein,

of any right, power or remedy of the Administrative Agent or any Lender

thereunder or (iii) constitute a course of dealing or other basis for altering

any obligations of the Borrower under the Loan Documents, or any other

contract or instrument.

 

         (c) This Agreement shall constitute a Loan Document.