Today Level 3 Communications (LVLT) filed an 8-K with the SEC detailing a series of swaps of equity for various issues of its convertible debt. With $362M due in September of 2009 and $903M due in 2010, the worry has been that if this credit crisis continues too long they will have trouble refinancing. The overriding question is, by doing these deals, have they improved their situation?
According to the filing, the company has issued or is issuing a total of 47,621,325 shares and paying $2.66M in accrued interest for the $108M face value following change in its maturities over the next few years:
|2009 6% conv||$362||$344||-18|
|2010 6% conv||$514||$514||-0|
|2010 2.875% conv||$374||$355||-19|
|2011 5.25% conv||$345||$330||-15|
|2011 10% conv||$275||$228||-47|
|2012 3.5% conv||$335||$326||-9|
The company will also save about $20M in interest on the repurchased debt over the remaining term of each issue. A complete list of their debt issues prior to this move can be found here. As moves go, this one is a bit surprising. Much of what the company exchanged was due in 2011 and even 2012, and none of it was for the 6% bonds due 2010, it would seem that this deal was not focused only on the crisis at hand. What we have seen so far seems insufficient to move the needle in that regard, so why do it now?
As recently as a few weeks ago the company was stating that any refinancing would be equity friendly. While this event wasn't huge, doing it with a more substantial amount of debt that *would* move the needle would definitely be equity unfriendly.
Just a Piece of the Plan?
I speculate that we are seeing only a portion of a larger move by Level 3, the equity unfriendly part that they need to disclose with the SEC since shares have been issued. Their 2009 and 2010 debt is trading at substantial discounts, and they have committed already to paying the 2009 debt in cash. If they weren't in the market buying that debt now on the cheap, they would be asleep at the wheel. But there's only so much of that debt available for cash on any particular day, so the company is perhaps using the savings from its repurchases in order to justify approaching other debt holders with equity deals for debt that wasn't for sale. The idea, perhaps, is to maximize the amount of debt they can roll up in a short period of time by any means possible.
There were several deals here with differing parties, and they happened in quick succession at the center of a credit crisis. For that to happen, Level 3 must be moving very quickly and hopefully opportunistically toward some goal before the window closes. So next week, when Level 3 reports earnings, I think we get an explanation of this move in a larger context. Hopefully for shareholders it is a larger *favorable* context.
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