The virtuous circle awaits Level 3, if they can only stop tripping over their own feet and get there. A virtuous circle is a pattern that reinforces itself in a feedback loop. If Level 3 can generate positive cashflow, then their stock will go above the strike price of some of their convertible debt and they can force or induce an early conversion. The interest saved then increases their cashflow, raises the stock further, and more converts can be eliminated, and so on up the ladder. So where are the rungs on this ladder? They are spaced out over the next 27 months.
The first of LVLT’s converts to be callable is in December of this year, and would be in the money at 3.98. So that is the first goal, and the payload is $345M in debt and annual interest of $18.1M. What makes this one interesting is the anti-dilution hedge attached to it. More on that another day.
The second of LVLT’s converts to be callable is in May of 2009, and is convertible at $3.60, lower than the first. If they reach goal #1, then goal #2 is much easier. The payload this time is $275M with annual interest of $27.5M.
The third is callable in June of 2010 and is convertible at 5.46, which should be achievable if we have gotten this far. The final payload is $335M with annual interest of $11.7M.
There are two other converts out there that convert at 7.18 and 9.99, but they cannot be called unless the stock price is much higher than the strike (i.e. 12-15), so we should consider those out of reach until maturity and the latter don’t come due until 2013. However the converts at 7.18 reach maturity just after the one at 5.46 becomes callable, in July 2010. That payload is $374M with annual interest of $10.8M.
Altogether then, if LVLT actually delivers on operating performance over the next 26 months, they have a built in cashflow acceleration pack of $1.33B in debt with annual interest of $68.1M that will convert into shares.
But they have to reach that first rung else they get nothing – so for LVLT shareholders the mantra ought to be $4 by XMAS or bust!
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