XO Communications is mulling a range of options for paying down its $377 million in debt amid a turbulent credit market. Meanwhile, the company is shifting its spending focus this year, adopting a more conservative approach after beefing up its network in 2007.

As XO’s debt (about 94% of which is owned by its chairman, Carl Icahn) grew to over $366 million last fall, the company announced plans to raise up to $900 million in new debt and equity to repay it “from time to time.” Since then the company has met with several banks to discuss its options but hasn’t yet settled on a precise course of action. The debt, meanwhile, begins to mature one year from next month.

Because “efforts to obtain financing from independent commercial banking sources have produced insufficient proposals,” the company said in regulatory filings this week, XO feared its 2007 annual report—filed on Monday—would have to include a warning from auditors about its ability to continue as a “going concern.” To avoid that stain, XO obtained a new $75-million one-year loan from an Icahn affiliate last week. The loan also provides for the possibility of an additional $70 million loan, but only until April 15.

According to a presentation the company gave in secret to its top shareholders last December, banks that XO met with were split between suggesting bank loans and high-yield debt. In general, they predicted that a rights offering of common stock might yield between $200 million and $500 million, while a debt offering might yield as much as $400 million. XO is likely to tap both sources.

The debt markets are “choppy,” XO reported from its conversations with banks, but there are “likely to be windows in which they open over [the] next few months.”

One question for XO is whether to address all elements of its capital structure simultaneously, which would be simpler and perhaps soothe concerns about the debt’s impending maturity next year, or to address it in stages, which could allow XO to take advantage of improvements in its financial performance.

A special committee of directors intends to “encourage” the company’s management to settle on a debt financing plan by late summer or early fall this year.

Given the current “choppiness” of the debt market, XO’s search comes at an unfortunate time, and some analysts have criticized the company for not addressing its debt in years past, when markets were friendlier. But fortunately for XO, this endeavor also comes at a time when some major network investment initiatives are behind it, allowing it to tighten up spending. And it also comes as XO’s chief rival, Level 3 Communications, is stumbling, having recently parted ways with its chief operating officer after several months of integration headaches.

In years past, XO has been outspent by Level 3, whose capital expenditures as a percentage of revenue bounced amid the teens while XO’s sat in single digits. But in 2007 XO matched Level 3 in spending 15% of its revenue. At the same time, it cut its net loss 11% on essentially flat revenue. That’s partly because XO’s network upgrades created efficiencies that cut nearly $48 million out of its cost-of-service.

With its top line projected to stay flat for another year (the company expects less than 3% revenue growth in 2008), XO could cut spending by as much as 15% this year, it said. But perhaps more importantly, it plans to shift spending from fundamental infrastructure upgrades to more “success-based” spending. Whereas the carrier spent nearly $50 million on infrastructure last year, it plans to spend just $15 million this year. “Success-based” spending (i.e., supporting paying customers) will grow from 57% of total spending to 67%.