SECOND FORBEARANCE AGREEMENT

 

 

 

                                                                   Exhibit 10.1

 

 

                          SECOND FORBEARANCE AGREEMENT

 

 

         SECOND FORBEARANCE AGREEMENT, dated as of May 23, 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 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(c) below),

including, without limitation, the failure to make scheduled amortization

payments under the Credit Agreements and interest payments under the 2000

Credit Agreement, might occur or continue occurring during the Forbearance

Period (as defined in section 1(a) below);

 

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

Plan and exploration of other possible strategic transactions, the Borrower,

the Subsidiary Guarantors, the Participant Lenders (as defined in the First

Forbearance Agreement) and the Administrative Agent executed a Forbearance

Agreement, dated as of March 16, 2005 (the "First Forbearance Agreement"),

pursuant to which the Participant Lenders (as defined in the First Forbearance

Agreement) and the Administrative Agent agreed to forbear from exercising

certain default-related remedies against the Borrower and the Subsidiary

Guarantors on account of the Specified Defaults (as defined in the First

Forbearance Agreement) for a limited period of time and upon the terms and

conditions set forth therein;

 

         G. WHEREAS, on March 29, 2005 the Borrower retained Alvarez & Marsal,

LLC as an adviser of the Borrower 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 Adviser");

 

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

Plan and further exploration of other possible strategic transactions, the

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

the Participant Lenders are willing, to continue to forbear from exercising

certain default-related remedies against the Borrower and the Subsidiary

Guarantors on account of the Specified Defaults for a further limited period of

time and upon the terms and conditions set forth herein;

 

         I. WHEREAS, the Borrower paid to the Administrative Agent, and has

periodically replenished, an advance of $1.5 million (the "Advance") in

accordance with section 2(e) of the First Forbearance Agreement, on account of

the Borrower's obligations to pay expenses and other amounts (including the

fees and expenses of counsel and financial advisors) under sections 9.03 of the

Credit Agreements; and

 

         J. WHEREAS, the Forbearance Period under and as defined in the First

Forbearance Agreement (the "First Forbearance Period") came to an end on May

23, 2005.

 

         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) July 21, 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, including without limitation, any failure by the Borrower

         or Subsidiary Guarantors to comply with the undertakings in Section 2

         hereof.

 

         (b) "Other Assets" means all assets of the Borrower and the Subsidiary

Guarantors other than Guaranteed Obligations Collateral (as defined in the

Security Agreement).

 

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

Default, as listed on Schedule II to the First Forbearance Agreement that

occurred during the First Forbearance Period, and as listed in Schedule II

hereto that might occur or continue during the Forbearance Period (as defined

in section 1(a)).

 

         (d) "Steering Committee Members" means those Lenders who are members

of the informal steering committee of Lenders whose names have been provided to

the Borrower in a letter from the Administrative Agent dated as of the date

hereof, as amended from time to time.

 

         Section 2. Acknowledgements and Undertakings.

 

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

that certain of the Specified Defaults (as defined in the First Forbearance

Agreement) occurred during the First Forbearance Period and that the Specified

Defaults (as defined in section 1(c)) might occur or continue during the

Forbearance Period (as defined in section 1(a)) and that certain of the

Specified Defaults (as defined in the First Forbearance Agreement) constituted,

and the Specified Defaults (as defined in section 1(c)) should they occur 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 and the Steering Committee Members 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

and the Steering Committee Members, 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 Monday of each week, a written or oral (in the sole

         discretion of the Borrower) update, and at any time on request of the

         Administrative Agent, 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;

 

                  (iv) all material information (except for information

         previously provided by the Borrower to the Administrative Agent and

         the Steering Committee Members) that the Borrower proposes or intends

         to disclose to the public as far in advance of such disclosure as

         practicable; and

 

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

         and records of the Borrower and its Subsidiaries (including the

         Restructuring Adviser 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), (iii) and (iv)

         above.

 

         (c) The Restructuring Adviser 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) The Administrative Agent has been paid and shall continue to

retain the Advance as an advance payment in respect of the Borrower's

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

Agreements, and shall continue to be entitled to pay such amounts (including

sums payable in respect of expenses or other liabilities incurred or paid by

the Administrative Agent prior to the date hereof) 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, within three Business Days following the receipt of a demand from

the Administrative Agent, make further advances to the Administrative Agent in

order 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.

 

         (h) Notwithstanding anything to the contrary in any Loan Document, the

Borrower and the Subsidiary Guarantors, as applicable, shall not, unless the

Required Lenders under each Credit Agreement give their written consent, sell,

transfer or otherwise dispose of any Other Assets, except for sales, transfers

or dispositions entered into (i) in the ordinary course of business or (ii)

after the date hereof with Net Proceeds totaling up to $2 million in the

aggregate; provided that the Borrower may sell the two Citation III airplanes

(tail numbers 800 MC and 890 MC) without consent provided that (x) the Net

Proceeds from each such sale are at least $4 million and (y) the Net Proceeds

are deposited in an account with the Collateral Agent (or, if the Required

Lenders under each Credit Agreement request in writing, applied first, to

prepay Borrowings (as defined in the 2002 Credit Agreement) in an aggregate

amount equal to such Net Proceeds and second, to the extent of any remaining

Net Proceeds, as required by section 2.11(c) of the 2000 Credit Agreement). The

Net Proceeds from the sale of such airplanes shall not be included for the

purpose of calculating the $2 million amount referred to in section 2(h)(ii).

 

         (i) The Required Lenders under each Credit Agreement may, without

prejudice to the rights of the Required Lenders under each Credit Agreement to

refuse or condition their consent in any way, require, as a condition to any

consent to any sale, transfer or disposition of any Guaranteed Obligations

Collateral or Other Assets (including Non-Core Assets) that the Net Proceeds

realized from such sale, transfer or disposition be applied first, to prepay

Borrowings (as defined in the 2002 Credit Agreement) in an aggregate amount

equal to such Net Proceeds and second, to the extent of any remaining Net

Proceeds, as required by section 2.11(c) of the 2000 Credit Agreement.

 

         (j) For the avoidance of doubt, the restrictions on the disposition of

Guaranteed Obligations Collateral contained in section 4.09 of the Security

Agreement while an Existing Agreement Event of Default or a New Agreement Event

of Default (as such terms are defined in the Security Agreement) shall have

occurred and be continuing, shall apply during the Forbearance Period and

remain in full force and effect.

 

         (k) All depository, operating, investment accounts and other accounts

of the Borrower and the Subsidiary Guarantors (in each case other than payroll,

withholding tax and other fiduciary accounts) shall no later than thirty days

after the date hereof be subject to control agreements that are in favor of and

reasonably acceptable to the Administrative Agent ("Control Agreement

Accounts").

 

         (l) The Borrower and the Subsidiary Guarantors agree that as soon as

practicable after and in any event within thirty days from date hereof, they

will open and maintain with the Collateral Agent (or, if approved in writing by

the Collateral Agent, any of its affiliates) an account or accounts to be used

by the Borrower and the Subsidiary Guarantors as their overnight investment

account or other holding account for daily excess funds ("Collateral Agent

Accounts", collectively with the Control Agreement Accounts, "Collateral

Accounts") and will close their existing accounts with U.S. Bancorp and its

affiliates currently used for such purposes.

 

         (m) In any event, and in addition to any other requirements that may

be applicable under the Loan Documents or sections 2(k) and 2(l) above, the

Borrower and the Subsidiary Guarantors shall not at any time after May 31,

2005, maintain more than $5 million of its available cash and cash investments

in the aggregate in accounts that are not Collateral Accounts; provided that

after the expiration of the thirty-day period referred to in sections 2(k) and

2(l) above, no funds shall be maintained in accounts other than the Collateral

Accounts except for the purposes specified in the next sentence. In addition,

funds shall be transferred to payroll, withholding tax and other fiduciary

accounts of the Borrower and the Subsidiary Guarantors solely to the extent

required to cover immediate disbursement needs in respect of employee payroll

incurred and paid in the ordinary course of business and in accordance with

past practice, and, with respect to fiduciary and withholding tax accounts,

solely to the extent necessary to meet legal requirements in respect of such

payroll.

 

         (n) The Borrower and the Subsidiary Guarantors shall use their

reasonable commercial efforts to complete as soon as possible the documentation

of a restructuring reasonably satisfactory to the Required Lenders under each

Credit Agreement.

 

         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) For the avoidance of doubt, the parties acknowledge and agree that

if any principal or interest on any Loan or any fee or other amount payable by

the Borrower under the Credit Agreements has not been paid when actually due

during the First Forbearance Period or is not paid when actually due from the

date hereof, in each case whether at stated maturity, upon acceleration or

otherwise, such overdue amount shall bear interest in accordance with section

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.