According to a press release this morning, Fairfax Holdings and Level 3 Communications (NYSE:LVLT, news, filings) have signed an agreement whereby Fairfax’s $127,962,000 in converts due 2013 will be converted into stock. These are the 15% converts that Level 3 sold $400M of back in the darkest period of the recent financial crisis – November/December of 2008 – with a conversion price of just $1.80. It was expensive money no matter how you looked at it, but it was a necessary evil that gave them the liquidity to survive the credit deep freeze.
Now that Level 3’s stock price is well above the conversion price, they would obviously like to wipe those ugly converts off the books for good. However, they can’t force conversion unless the stock price is 222.2% above the conversion price, which is not yet the case despite the recent surge. So they are inducing Fairfax beyond the 71M shares the deb converts to with an extra $28.8M in cash. That’s almost precisely another year and a half of interest payments – which I believe is exactly the remaining term on the notes since they come due on January 15, 2013. There is still another $272M of this debt out there, but it seems like Level 3 might be able to work out a similar agreement with the other bondholders.
Level 3 would clearly like to clean up its balance sheet as much as possible, because after the Global Crossing deal closes it looks as if they will be in a sweet spot where they have the scale to finally make it to a place where they can support the capex it takes to really grow their business. Of course, first they’ll have to integrate it all, but the cleaner the slate they start with the better – hence the debt move.
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The converts mature in June ’13 so the cash interest payment ($28.7 million) really doesn’t represent an inducement to convert. It looks like it makes them roughly whole for the PV of interest payments they would otherwise have received, but no more. It is hard to tell precisely since the convert date isn’t specified but if the maturity date was 6/15/13 and the convert date is 7/15/11 then interest that would otherwise have been payable is ~ $36.8 million. So LVLT saves a little interest and the converter gets immediately liquid common. The interest savings is why LVLT did this– no other reason I can see to do it.
Is it too hard to take the CFO at face value even while Enron said it would never happen? Well, in the mean time, making them whole to maturity proves him right at least partially. This was “HARD MONEY” from the day it hit our books. 🙁
“This transaction is positive for our company as it helps us delever,” said Sunit S. Patel, chief financial officer of Level 3.
So Longleaf hasn’t converted their stake and I jsut noticed that after the close they actually added to their Level 3 position. It looks like Longleaf is a new 12% shareholder in GX. I guess they did not feel like getting diluted.