For Level 3 Communications (NYSE:LVLT, news, filings), the balance sheet work never ends, although it has been getting easier. Yesterday the company took another step toward erasing some very expensive money from the books. They have signed an agreement with major shareholder Southeast Asset Management to exchange $100M in senior converts for 5.4M shares of stock.
These are the 15% converts due 2013 that the company issued in the winter of 2008, at a time when the financial world was imploding and the company was seeing major churn looming as its customers pulled back. They needed to survive a credit deep freeze that threatened to last a long time (and which took down Nortel and a few others at the time), and it was the most expensive series of notes the company has ever issued. Those notes are now the next major lump of maturing debt that Level 3 must deal with, and they'd clearly rather eliminate them sooner than later.
Of course it was mostly friendly hands that bought them, and the company has been trying to get the dilution over with for some time. Last July, they did a similar deal with Fairfax for $127M of notes. The company's stock price has lately risen toward the conversion price, which probably helped the stars align for yesterday's agreement. There are still another $172M or so of the notes out there, and I'm sure Level 3 will try to get them off the books as well if the opportunity arises.
Interestingly, the deal also modifies the existing standstill agreement to allow SEAM to buy 4M more shares in the open market. That agreement has been in place for years to help protect the company's NOLs which would be at risk if there was a change of control in the eyes of the IRS. But the balance was shifted by the Global Crossing deal and I guess there's more room to spare now. That doesn't mean that SEAM will actually be buying, of course. We'll have to check the SEC filings in May for that.
With the Global Crossing integration now in full swing, Level 3 is looking ahead to calmer waters in 2013 when the spreadsheets say they will finally have turned the corner on their debt. If things go well, they will either be generating lots of cash or spending it on expansion projects they have had to eschew for so long.
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