The Debt Markets Give Level 3 a Hug

January 10th, 2012 by · 11 Comments

This morning Level 3 Communications (NYSE:LVLT, news, filings) said it was looking to raise $350M in a private offering of senior notes due 2020.  By the end of the day though, the offering seems to have grown just a bit as a Bloomberg note now says they are raising a refinancing war chess of $900M at 8.625% -- an extra mere $550M. Apparently while the stock market has not been treating the company well lately, the debt markets are quite happy with them.

The money is aimed at refinancing their 9.25% senior notes due 2014, of which just over $800M remained on the books as of the end of Q3 - so they'll now be able to take it all out with some left over. Level 3 has been suggesting that it would take further refinancing actions like this since completing the Global Crossing transaction.  Current rates and their new balance sheet are enabling them to reduce net interest expense and they've always been aggressive in pushing back their debt load in advance.

The company also finally put pro-forma Q3 numbers out there in an SEC filing, giving me enough information to start to throw together a new post-GLBC financial model for the company - there had been so many moving parts before as to make the effort more art than science.  I'll see if I can churn that out in the next week or two

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Categories: Financials · Internet Backbones

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11 Comments So Far


  • Anonymous says:

    what does the language on the use of excess funds imply? just boilerplate?

    “The remaining proceeds will constitute purchase money indebtedness under the existing indentures of Level 3 and will be used solely to fund the cost of construction, installation, acquisition, lease, development or improvement of any Telecommunications/IS Assets (as defined in the existing indentures of Level 3), including the cash purchase price of any past, pending or future acquisitions. “

    • Rob Powell says:

      Hmmm, while it means something to the debt guys, Level 3 has had this language before and I haven’t really seen that it affects much on the ground for anyone else. As for the precise meaning, perhaps a reader from the financial sector might help?

  • How Will This Work says:

    Rob,

    Having a business degree I have a decent understanding of a balance sheet. Can you explain how a company can continue to push out debt like Level 3? Will they ever get out from under this debt? What would happen to the stock if they didn’t have the debt?

    Thanks,
    Ted

    • Rob Powell says:

      The idea is not to get out from under it, but to grow large enough to shoulder it. Ever notice how much debt Verizon, AT&T, Sprint, CenturyLink, etc have?

      As for what would happen if they didn’t have the debt, it’s a hypothetical requires one to say first how they got rid of it. Again though, the better question is what would happen to the stock if the debt were no longer too large for the company and hence didn’t restrict their ability to spend on growth efforts.

      • Anonymous says:

        That must have been Greece’s pitch to investors: “We want to grow into our debt.”

        How’s that workin’ out for them?

  • Brian Scully says:

    As the industry fixed asset ROI norm is 15% and higher, legacy L3 and now post GC L3 ROI is way below industry norm and yet they have chosen to take a step-up in basis of $1.9B which further dilutes the ROI. It certainly makes the debt to asset ratio LOOK better. I wonder how they pass the required impairment testing?

  • Committee to Appoint Sunit to Treasury Secretary says:

    Well, I’ll say one thing. Sunit is a master at juggling debt and extending maturities. But other than kicking the ($807m) can down the road, Sunit hasn’t saved LVLT anything. The headline savings from exchanging 9.25% bonds for 8.625% are purely illusory.

    Putting aside the additional $93m LVLT raised, the interest expense on $807m at 8.625% is $69.63m. Compared to interest expense of $74.65m on the 9.25% bonds being retired this looks good because it creates almost $5m in annual interest expense. Looks are deceiving.

    The $807m of 9.25% are callable until 11/1/2012 at 102.313. So LVLT will have to pay a premium of $18.67m to retire those bonds. Additionally, there is an underwriting expense of roughly 2% on the bonds. The 2% underwriting fee on just the $807m is $16.14m. Adding the $18.67m call premium expense to the $16.14m underwriter’s expense you get a total of $34.81m. Let’s not do any fancy math here that highlights the cost of spending $42m today versus over a longer horizon and merely average the $34.81m over the next 8 years. That $34.81m averaged over the next 8 years amounts to $4.35m annually. Add that $4.35m to the $69.63m and you get $73.95m. Essentially, this new financing has saved LVLT $693k/yr in debt service, not $5m. IT DID, however, extend the maturity from 2014 to 2020. That appears to be Sunit’s biggest objective.

    One last kicker to the whole story, $650m of the 1.25b 9.25% bonds were issued at a premium of 101.75 which gave LVLT an effective yield of 8.86%. Here’s to you Sunit for juggling all those balls in the air. But it would be nice to see you actually eliminate some of this debt instead of juggling it.

    http://www.wikinvest.com/stock/Level_3_Communications_%28LVLT%29/Senior_Notes_Due_2014

    • Committee to Appoint Sunit to Treasury Secretary says:

      as noted above…

      The following issue is being redeemed via the company’s call option:

      Issuer: Level 3 Financing Inc Coupon: 9.25 percent Maturity: Nov. 1, 2014 Redemption Amount: $806.65 million Redemption Price: 102.31 percent Amount Remaining: Fully Retired Security ID: US527298AM56 Effective Date: Feb. 12, 2012

  • World's Worst Investor Police says:

    Appears STT might be trying to monetize their LVLT holdings. An SEC registration statement shows STT registering for sale their 50+m shares (or 24%) of company. 100% of the proceeds, according to the filing, will go to STT.

    STT is seeking a “maximum price” of $20.10. I find that pretty amazing since the purchase price of Global Crossing was $24. (After split GLBC 16 to 1 then reverse splitting LVLT 1 for 15, the original $24 is actually $22.5 per share in the current stock.) STT seems willing to take a 10.5% haircut. (Strong vote of confidence for LVLT management.)

    http://sec.gov/Archives/edgar/data/794323/000110465911065181/a11-29911_1s3asr.htm

    So CEO John J Legere who created no shareholder value the entire time he was CEO (and that’s being kind) walked away with $60m, CFO John Kritzmacher for his 3 years of work walks away with $15m and STT takes it in the shorts.

    STT’s GLBC investment demonstrates just how incompetent they are. Consequently, if they can sell these shares, I strangely see their exit from LVLT as a huge positive. Unfortunately for shareholders, their signal to sell (which they are required to do under the law) will take that stock way down before it goes back up.

  • Henry Reardon says:

    STT’s initial investment in GC was 250M to restructure that company and get it out of Ch. 11. If they sold based on yesterday’s market close that would be a rough value of 902M (50+M shares @ 17.88/share), which sure looks like a profit of 652M before taxes, etc. How is this a haircut? It doesn’t seem to me this issue specifically reflects incompetence on the part of STT; of course I could be wrong…

  • World's Worst Investor Police says:

    Hank, STT’s initial EQUITY investment may have been $250m

    (see p.5 http://sec.gov/Archives/edgar/data/1061322/000095013003003085/dex991.htm)

    But they also were the holder of $200m in Long Term Notes when GLBC emerged from bankruptcy. Bringing the investment at that point up to $450m, not $250m

    see F-8. http://sec.gov/Archives/edgar/data/1061322/000119312504050577/d10k.htm

    By Oct 2004 they had provided another 125m in debt financing, bringing the total up to $575m

    http://sec.gov/Archives/edgar/data/1061322/000119312504196580/dex991.htm

    and on and on it goes as evidenced in this Oct 4 2004 filing.

    http://sec.gov/Archives/edgar/data/1061322/000119312504211443/d8k.htm

    Ultimately all the accumulated debt and I believe there is more than the $575m identified above was converted to common equity in ’07.

    A $575m investment (and I believe it’s larger) converted into 900m 8 years later is a 5.7% annual return. Hardly a return one would hope for with that type of risk. More importantly, they still haven’t monetized that investment.

    As for shareholders they made out much worse than STT if they held for the full period. GLBC emerged from bankruptcy in 2004 at $30 and LVLT bought them out 8 years later $24.

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