THIRD FORBEARANCE AGREEMENT

 

 

 

                                                                   Exhibit 10.1

 

                          THIRD FORBEARANCE AGREEMENT

 

 

         THIRD FORBEARANCE AGREEMENT, dated as of July 21, 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, the Forbearance Period under and as defined in the First

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

23, 2005;

 

         I. 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 Second

Forbearance Agreement) and the Administrative Agent executed the Second

Forbearance Agreement, dated as of May 23, 2005 (the "Second Forbearance

Agreement," together with the First Forbearance Agreement, the "Prior

Forbearance Agreements"), pursuant to which the Participant Lenders (as

defined in the Second 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 Second Forbearance Agreement) for a limited period of time

and upon the terms and conditions set forth therein;

 

         J. 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 Prior Forbearance Agreements, 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;

 

         K. WHEREAS, the Forbearance Period under and as defined in the Second

Forbearance Agreement (the "Second Forbearance Period," together with the

First Forbearance Period, the "Prior Forbearance Periods") came to an end on

July 21, 2005; and

 

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

Plan, 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.

 

         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) September 9, 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 (i) on Schedule II to the First Forbearance Agreement that

occurred during the First Forbearance Period, (ii) on Schedule II of the

Second Forbearance Agreement that occurred during the Second Forbearance

Period or (iii) on 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 May 23, 2005,

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 and the Second Forbearance Agreement) occurred during the First

Forbearance Period and the Second Forbearance Period, respectively, 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 Prior Forbearance Agreements)

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 Tuesday 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 restructuring activities, including the Borrower's

         efforts to sell any material assets or 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 (including FTI Consulting, Inc.) 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) with Net Proceeds totaling up to $2 million in the aggregate,

calculated from May 23, 2005; 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 opened at any time (in each case

other than payroll, withholding tax and other fiduciary accounts or accounts

held by the Collateral Agent) shall be or continue to 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 they will

continue to 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 and accounts in

the name of the Collateral Agent holding funds of the Borrower and/or one or

more Subsidiary Guarantors as cash collateral, "Collateral Accounts").

 

         (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 maintain more than $5 million

of its available cash and cash investments in the aggregate in accounts that

are not Collateral Accounts; provided that 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 f