Wow, while I was writing up my model, Level 3 dropped a bombshell. The company announced commitments for $400M in debt from a group of holders ranging from top shareholders Southeast Asset Management and Fairfax on down to board members Walter Scott and Robert Julian. Simultaneously, they issued tenders for their 2009 and 2010 convertible debt, currently trading at various discounts. Where to start? They totally surprised me, I expected the company wouldn’t make a move for a while yet. Others did see signs recently that the company had a refinance in hand, congrats to them.
They clearly couldn’t have raised this money from anyone other than interested parties, some of whom were buying stock in October. The money is clearly expensive, at 15% cash interest and convertible at a price of just $1.80. However, they will be buying back debt at a discount, which will reduce the pain somewhat – and that is clearly a big part of the plan here. If they take the full $400M, that would be an extra 222M shares of stock. Equity friendly? If one asked 6 months ago, the answer would have have been quite different. Today? I think the market was expecting much worse.
So where does this put them? Well, if they do buy back the $571M in face value of debt that they want to, it looks as if they will have face value of about $152M due in 2009 and $418M due in 2010, which adds to $570M in maturities – conveniently just below their current unrestricted cash balance. I doubt very much that is an accident, the line from here will be that they no longer need to raise money anytime soon because they are FCF positive and have enough cash to meet their maturities.
But that 15% debt, that’s $60M per year in interest, and the converts they are paying off were costing $27M in interest – so FCF takes a $33M or so hit. That shouldn’t be enough to derail current FCF trends, assuming the economy doesn’t get even worse. It remains to be seen though if they can get their debt at the discount they are offering. Just making this deal may change the prices, and I don’t know how much. On the other hand, a lot of debt holders need cash these days… This deal isn’t done yet, we will just have to see how it turns out in the end. But the financial wizardry of LVLT continues to amaze, who would have thought they could find $400M in this market?
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