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SECOND FORBEARANCE AGREEMENT

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Sectors: Telecommunications
Governing Law: New York, View New York State Laws
Effective Date: May 23, 2005
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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 Bor
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