Moody's rates Level 3 Communications (NASDAQ:LVLT)
Reuters, Friday, April 17, 1998 at 14:21
(Press release provided by Moody's Investors Service)
NEW YORK, April 17 - Moody's Investors Service has assigned
a B3 rating to Level 3 Communications, Inc.'s proposed $1.5
billion senior notes due 2008.
This is Level 3's first debt issue and therefore the first
time to be rated by Moody's.
The ratings reflect the very early stage of the company's
development with no current operations in the planned core
business, the expectation of substantial negative cash flow for
a significant period, and a requirement of $5 billion in
additional funds to complete the current business plan.
The rating also reflects several strengths, including an
unusually strong management group who have worked successfully
together in a similar venture, a strong capital structure and a
well laid-out business plan which has the potential to provide
Level 3 with a significant cost advantage compared to its
competition.
Peter Kiewit Sons', Inc. invested approximately $500
million in the development of MFS Communications in the early
1990's, which under the leadership of Jim Crowe and his
management team, became the largest and most successful of the
competitive telephone companies (CLECs) to date.
MFS was sold to WorldCom in 1995 for approximately $14
billion. Crowe and a large group of the management team
returned to Peter Kiewit Sons' with the goal of duplicating
their success, under the corporate name of Level 3.
The similarity between the MFS experience and the Level 3
plan, combined with the fact that the management team has
worked successfully together before, makes management an
unusually strong supporting factor in this credit.
Additionally we recognize that the business plan has been
carefully planned and sensitized.
Also, important early steps in the plan have been
completed, such as securing rights-of-way in the more difficult
western US, and a capacity lease agreement allowing the company
to transport early service on Frontier's network.
Still, the company is at the first steps in the plans'
execution. In Moody's view, even given the strength of this
premiere management team, the large size of this project and
the early stage of its execution leaves a significant amount of
business development risk.
However, due to the expected rapid pace of the network
construction and business' operational development, we will
likely have a great portion of these risks clarified within the
next 18 months.
The company acknowledges this with a conservative
capitalization philosophy (also seen at MFS) which relies more
heavily on equity in the initial construction period, and
emphasizes debt to fund success-based expansion.
With over $2 billion in cash equity available, we expect
the company's debt-to-contributed capital ratio at the end of
1998 to be less than 45%, a very strong level.
However, this is admittedly a conservative measuring on our
part since the company has additional equity in assets other
than cash.
Level 3 currently holds approximately $3 billion
book-valued assets, including over $2 billion in cash and
marketable securities, largely the proceeds from the sale of
non-core assets.
Level 3 has a market capitalization of approximately
$8billion. Moody's considers certain existing assets to be
non-core and likely to be sold, including interests in coal
mines and a toll road.
However, certain assets such as a systems integration
service company, should strategically fit. Although we
recognize the existing assets generated $92 million in EBITDA
in 1997, the negative cash flow of the new company will quickly
overwhelm the cash generation of the strategic existing assets.
Given the current business plan we would expect Level 3 to
reach the EBITDA break-even inflection point in approximately
3-1/2 years. Further, assuming that the company funds the
additional capital need of approximately $5 billion with a
balance of debt and equity, we could expect a debt-to-EBITDA
ratio of five-times, in approximately six years.
We consider the time to cash generation to be standard for
an early stage company in this sector. However, the cash flow
leverage remains higher longer due to the company's continuing
construction plans.
Level 3 will build a company based on a communications
network in and between 50 cities in North America and several
European and Asian cities.
The company will directly sell competitive communications
services to large corporations while developing third-party
sales channels to provide services to smaller businesses and
perhaps residential customers.
By leasing transmission capacity it will be able to enter
markets and build a customer base prior to completion of the
company's own network. The company plans to begin revenue
service in certain markets in the second half of 1998.
The network will take advantage of current technologies,
including the efficient Internet protocol (IP). A network which
is optimized for IP has the potential of carrying approximately
10 times the traffic of a traditional circuit-switched network,
therefore given a large volume of traffic, IP can provide a
substantial cost advantage.
However, IP has some limitations which may not be resolved
for the next year or two, making IP a better solution for data
and fax services, and less acceptable for voice and video.
This makes Level 3's target customer especially appropriate
since approximately 75% of large business' communications needs
are for data and fax.
The proposed senior notes will be issued at the parent
holding company, where we expect most of the future debt will
also reside. Due to the significant asset value in Level 3, the
limitation on additional indebtedness protection within the
indenture is virtually meaningless.
Moody's calculates that the company could raise $2.7
billion in additional debt today (beyond the proposed notes)
prior to the clause having affect.
Beyond that, carve-outs for construction financing and bank
facilities provide significant additional debt capacity. Still,
we do take comfort from the historic view of how management
financed MFS and management's current intention to keep a
balanced capital structure at Level 3.
From a legal standpoint, Peter Kiewit Sons' spun-off the
Kiewit Construction Group and changed its name to Level 3
Communications, Inc. (The spin-off company changed its name to
Peter Kiewit Sons', Inc.) Level 3 will move its headquarters to
Louisville, Colorado, pending construction of a new facility in
Broomfield, Colorado.
Copyright 1998, Reuters News Service |
