McLeodUSA is negotiating with its lenders to restructure the company’s capital after a four-month search to find a buyer or strategic partner failed.

“The company has been exploring a capital restructuring with its lenders while also attempting to identify a potential strategic partner or buyer,” the competitive local exchange carrier said in a statement issued Thursday. “At this time, the company has concluded that there is not an acceptable strategic partner or buyer.”

McLeod announced in March that it was actively searching to sell the company or find a strategic partner, retaining outside advisors--Miller Buckfire & Co. and Gleacher Partners--for help. At that time, the company received forbearance from its lenders, freeing McLeod from paying $18.1 million in scheduled principal and interest payments on $777 million of mature long-term debt while the company searched for a lifeboat. When that agreement expired in May, McLeod received an extension until July 21. This week, the agreement was extended again to Sept. 9, 2005.

The CLEC is now working to enact a plan to convert much of its debt into equity, allowing its lenders to become the company’s majority stockholders.

For the first quarter of 2005, McLeod reported $160.5 million in revenue--sequentially flat and 16% lower than a year earlier--and a net loss from continuing operations totaling $97.5 million (or $0.32 per share), a slight improvement sequentially but nearly 7% wider than a year earlier.

McLeod ended March with $34.9 million in cash, having spent $11.9 million in the quarter. The company reiterated this week that its cash and cash flow from operations are sufficient to maintain normal operations as long as the company does not have to pay the principal and interest on its debt.