The credit-rating agency said the action reflects the firm's concern over several aspects of Qwest's business including its ailing long-distance business and uncertainties coming from an investigation of the company by the Securities and Exchange Commission over accounting issues.
The debt-rating cut follows a similar action taken last week by Standard & Poor's, another credit-rating firm. A cut in debt rating usually raises interest rates on a company's existing debt, which makes it harder to meet interest payment obligations. A cut can also make it more expensive for a company to issue new bonds.
The sluggish economy has hit telecommunications carriers particularly hard. Start-up carriers such as, McLeodUSA and Global Crossing have all filed for bankruptcy over the past year. Long-distance carrier WorldCom also has faced angry investors over its , leading to the ouster of the company's chief executive.
The rating change affects about $26.4 billion of the company's debt. Moody's cut bonds issued by Qwest and its subsidiary, Qwest Capital Funding, to Ba2 from Baa3, otherwise known as "junk" status.
Bonds from Qwest's local phone business subsidiary, which holds about $7 billion worth of debt, were cut to Baa3 from Baa2, one notch above junk.
"The local business is a pretty solid business," said Robert Konefal, a managing director at Moody's. "The long-distance part of the business is consuming capital and is not delivering returns on that capital."
Qwest said in a statement that Moody's decision was disappointing, and that it was based on no new information. The company added that the decision will have "no substantial impact" on its business operations.
Concerns over the company's health are not new. Qwest gave investors a start a few months ago when it had tothe terms of its loans.
The Denver-based telecommunications carrier is also trying to raise cash from the sale of its non-core assets such as nonessential phone lines, wireless network assets and itspublishing business.
The company says that it will become cash flow positive in the second quarter of this year and remain so for the year.