A second bond rating agency has downgraded Hawaiian Telcom Communications Inc., noting that the company may default on debt payments.

Moody's Investors Service said the action reflects the possibility of default following the company's delay of $26 million in bond interest payments earlier this month.

"The rating actions are prompted by our belief that the company may not be able to successfully negotiate a restructuring plan with its creditors and that an imminent default may therefore be likely," said a note released by Moody's.

Hawaiian Telcom has faced a number of challenges to its business, including Oceanic Cable's challenge to its grip on telephone service and a deteriorating economy. It has looked for ways to restructure its balance sheet, including reducing debt or attracting more capital, since the beginning of October and has hired the Wall Street firm of Lazard Freres to help it do so.

Hawaiian Telcom vice president Steven Golden said the company had anticipated the Moody's downgrade and is continuing to work toward a restructuring plan that would result in a stronger, more financially viable company.

"Our effort now is to continue on this balance sheet restructuring and to work with all the parties," Golden said. "The discussions are continuing."

Golden declined to comment on what options Hawaiian Telcom has if the talks fail.

He noted that the company had $80 million of unencumbered cash as of Oct. 31.

Moody's downgrade follows one by Standard & Poor's Ratings Services after Hawaiian Telcom announced Nov. 3 that it was postponing interest payments on three of its notes. It said it was using a 30-day grace period to discuss debt restructuring with creditors, including holders of the notes. Hawaiian Telcom also said the move would not impact normal business operations.

Standard & Poor's Ratings Services reacted by slicing the telephone company's corporate credit rating to "D," its lowest rating. Standard & Poor's noted it considers payments to be in default when non-payment is caused by a borrower being under financial stress.

Moody's downgraded Hawaiian Telcom's corporate family rating to "Caa3," two steps above its lowest rating.

It also assigned a probability of default rating of "Ca," a rung that signifies a company likely or near default with some prospect existing for recovery of principal and interest.

Moody's said it believes Hawaiian Telcom's cash position remains marginally adequate to cover its projected free-cash flow shortfall and satisfy its debt service obligations through the end of 2009.

But if the company fails to make the interest payments before the end of the grace period, it would trigger a default and likely face all debts becoming due and payable in full. Moody's said Hawaiian Telcom's ratings will be under ongoing review for future ratings downgrades, with it watching for the outcome of the debt payment postponement and its restructuring plan.