Level 3 Does the Refi Two-Step

December 16th, 2008 by · 6 Comments

Last month, internet backbone provider Level 3 Communications (LVLT) announced a refinancing initiative in which the company would sell $400M of new 15% convertible notes and tender for its 2009 and 2010 debt, but the cash being raised was conditional on some 50% of the debt to be tendered.  The credit crisis forced the company and its backers to take action, and they did – but there was a wide range of possible outcomes, with one of the most commonly voice being that they would get nothing and go back to the drawing board.  Well, not quite.

They didn’t make it to that 50% by the deadline, so they just adjusted the offer. And you can see that the terms of the offer were very fungible, Level 3 and its backers probably intended from the very beginning to take whatever they could get from this maneuver, there was never any chance of a collapse of the deal – the only question was how much they could lure in.

Issue Outstanding Tendered New Threshold
2.875% Converts due 2010 $354.5M $163.8 $162M
6% Converts due 2010 $481.7M $174.4 $173M
6% Converts due 2009 $305.1M $137.5 $135M

As you can see, the goalposts were very precisely repositioned so that the field goal will be good, the sellers of the new debt have signed off on the change, and the tender was extended for another 7 days. Why extended? Well given the doubt that this deal would go through there were aparently many potential participants that sold their bonds in the market rather than tender them, and the bonds have traded below the tender price the entire month. Now that it is clear it will go through, why not see if they can shake loose any more debt if it is a sure thing? As usual, Level 3 is showing that whether or not it ever makes money in bandwidth, it surely knows how to dance the refi two-step.

If nothing new happens in a week, LVLT would seem to raise $373M in new 15% convertible notes, and pay about $360M to buy back $470M of 2009 and 2010 debt. By my count, that would leave them with maturities of $170M in 2009 and about $500 in 2010. With a current cash and equivalents balance of $583M and operations supposedly to generate positive free cash flow in 2009, the hill doesn’t look impossible anymore.  While they surely would prefer to refinance it all, it seems possible they *could* pay it off if they had too.  And then there’s 2011, but let’s not go there! 🙂

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Categories: Financials · Internet Backbones

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6 Comments So Far

  • jeremy drane says:


    i posted something similar on IV. they have 583M in cash and i believe they will generate around 75M in cash this q. i expect they end the year around 650M (i assume wcap reverse in a big way in q4). i also think they will generate around 200M for both 09 and 10 combined worst case. so i think total cash over the period could be around 850M. it looks like they owe 672M in debt over the next 2 years so they might have around 150M in cash to operate (the bare min considering wcap etc). so what this tells me is that they are either going to do one of two things (or both):

    1. sell equity and do a reverse
    2. sell assets (europe)

    i also think they brought in LUK man to cut the crap out of our expenses. so for all of you LVLT folks that claim there are more VP’s than ski resorts in CO, we shall see.

    bonds are trading UP …. my 17’s moved up a bit so i think the market is starting to realize that SEAM et al will do what it takes to get us through the next few years and hope the market heals and valuations move up. And oh yea – that we actually start to GROW too! good day for LVLT debtholders fo sho!


  • jeremy drane says:

    rob, i would add that my previous comments are meant to be worst case. morty doesn’t believe this will happen because he believes credit markets will reopen (as do i) however im looking at the cash flows considering no credit is available to see how long they could pay against the debt before they would need to do more financial engineering. based on what i can see they gets them around 24months which *should* be enough to get markets healed but you never know.


  • carlk says:

    You seem to have forgotten the two insiders whose tenders bring the aggregate 15% convert amount before fees to 400M.

    I believe the WS stipulation on the 09’s has been satisfied based upon the redemption news today.

    • Rob Powell says:

      Carlk, you may be right, there may be another $27M coming from Walter Scott and Robert Julian. I guess I’ll believe it when I see it though, after all if they can change the threshold so easily, they can surely change the terms also! But I think Scott and Julian are tendering bonds too, just rolling their old converts into better converts so as long as the deal happens at all I expect the full 400M is likely.

  • jeremy drane says:

    carl can you please elaborate re the two insiders and the 400M? not sure i understand. thx.

  • carlk says:

    Aren’t Walter Scott and Robert Julian still expected to add to the pot?

    The escrow deposits excluded those two insiders as I recall (361M by memory).

    I realize that they waived the aggregate amount of the new convert financing to 373M; however, I believe that was accounting for what Mr. Scott might NOT release investment capital assuming zero 09’s were tendered inclusive of his original stipulation.

    The waivers, as we have seen are not written in stone, and are very fluid.

    Seems to me that Mr. Scott will be adding more to the pot since release of the 09 data.

    I could be wrong, have missed something or be misunderstanding the chronology of events along with the legal statements surrounding this matter.

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