Level 3 Shares Fall, Bonds Climb
By Jonathan Stempel
NEW YORK (Reuters) - Level 3 Communications Inc.'s (NasdaqNM:LVLT - news) bonds surged and its shares fell as much as 14 percent on Friday, a day after the debt-heavy fiber-optic network builder said it may exchange some of its debt for common stock.
The Broomfield, Colorado-based company, which last week posted a $731 million second-quarter net loss, said late Thursday it amended its senior secured credit agreement with a group of lenders led by J.P. Morgan Chase & Co. (NYSE:JPM - news) to allow it to conduct an exchange.
``The amendment gives Level 3 the option to exchange outstanding debt for common stock, should the company choose to do that,'' said Paul Lonnegren, a Level 3 spokesman.
Level 3 is one of many emerging communications companies suffering amid the shakeout in the technology sector, which has forced many customers to disconnect services and led many telecommunications providers to bankruptcy.
The company is one of the largest U.S. issuers of ``junk,'' or high-yield, bonds, which carry higher credit risks. It joins another telecom, Reston, Virginia-based voice and data services provider XO Communications Inc. (NasdaqNM:XOXO - news), in announcing this month that it may take back some of its debt.
Analysts said Level 3's announcement may signal that the company, which said this month it has nearly $8 billion of long-term debt but has enough cash to run into 2004, may be optimistic about its prospects.
``The exchange potentially makes a fully funded status for Level 3 a greater possibility by reducing interest expense and cutting leverage,'' said Thomas Reedy, who owns Level 3 bonds and helps run the $1.6 billion Oppenheimer Champion Income Fund.
``What this is signaling is that the company either has negotiated or is in the process of negotiating exchanges of high-yield bonds into equity,'' he said.
Lonnegren declined to say if Level 3 is in such talks.
Level 3's stock was down 52 cents, or 10.3 percent, at $4.55 in active Nasdaq trading, after falling as low as $4.37 earlier. More than 8.6 million shares changed hands shortly after midday, compared with the 9.85 million average daily volume over last 90 days.
Traders bid its 9.125 percent senior notes maturing in 2008 at 58 cents on the dollar, up from 51.5 on Thursday, though they still yield 21 percent to maturity. The bonds traded in the low 40s earlier this month, a level suggesting that investors consider default more likely than recovery.
OPPORTUNISTIC
``What we've been seeing is companies looking at opportunities to buy back debt cheap, given their trading levels,'' said Catherine Cosentino, a director at rating agency Standard & Poor's. ``A selective, opportunistic repurchase can be viewed as trying to turn a weak market into a positive.''
As of April 23, Level 3 had 368.2 million common shares, a filing with the Securities and Exchange Commission shows.
The company, which serves 2,275 customers in 67 markets in North America, Europe and Asia, said last month it expects to have about $600 million of cash EBITDA (earnings before interest, taxes, depreciation and amortization) this year.
``If it doesn't use up the funding it needs to complete its business plan, (the exchange) could be a very wise move,'' said an analyst who asked not to be named. ``This says equity holders expect the company to survive. Still, it's risky because it's using up some cash in may need later as a cushion.''
Reedy said Level 3 is trying to act preemptively.
``The pattern of telecom companies waiting until they absolutely have to restructure has not provided a good return for either stockholders or bondholders,'' he said. ``It makes more sense to try to preempt that ... by doing a debt-for-equity swap while the company still has a chance to remain solvent.''
Moody's Investors Service last month warned it may cut Level 3's ``B3'' senior unsecured debt rating, its sixth highest of 11 junk grades. S&P last month cut its rating for that debt two notches to ``CCC-plus'' from ``B.'' Its new rating is roughly one notch lower than Moody's rating. |
