Corporate debt ratings are wierd. Today Moody’s called Level 3 Communications’s (LVLT) new debt deal a default and cut their ratings, following on similar S&P move last week. As many have noted, this is by the book, it happens almost anytime a company tenders for its own debt below par – and certainly every time Level 3 has. But that doesn’t mean it makes any sense at all. Cogent bought back half its debt below par last month but it wasn’t in ‘default’ according Moody’s and S&P because, I assume, the company didn’t ask first.
Why is this insane? They’re downgrading LVLT debt because the company is making it safer to own, reducing the chance of an actual default by incuring the wrath of credit ratings agencies. Had the company not acted to refinance this debt, it would have been more likely to actually default and hence, apparently, would have merited more highly rated debt. After all, Moody’s rated Lehman debt at A2 right up until Sept 15 and they didn’t utter a peep while LVLT debt actually *was* at greater risk before their refinancing deal. Great job estimating the risk! And we wonder why Wall Street never saw this crisis coming?
To top it all off, Level 3 actually wants its debt to be downgraded – at least temporarily. The downgrade actually helps Level 3 complete the deal by making their tender look better, assuming a few people in the world actually care what Moody’s and S&P have to say on the subject. Not that the company needed much help, its debt is still trading 10% or more below the prices they are tendering for it. Which is actually rather odd and seems to mean one of two things. Either the market thinks LVLT can’t get the 50% of its 2010 debt that it needs to complete the deal because its offered prices are too too low, or people are so desperate to sell that they can’t wait three weeks. Given that the first is self-contradictory (the offer is too low and nobody wants to sell, so they prefer to sell even lower?), is the latter true? Opinions welcome.
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I’ve been wondering how much they won’t have to buy back at higher prices because they became so effective at buying it even cheaper in the open market.
There’s havoc in hedge fund land, you know!
As we saw in the “conversion” filing, they were already working on these tranches as well as others.
Some believe the 50% thresh hold was a lock also in conjunction with known friendlies already holding that paper, so that, the speed at which they announce their goals being accomplished, might surprise others.
“It is finished,” or to interpret in Greek, “It is accomplished.”
You see, “Money is never a problem for Level 3.” 🙂
A few odd lots are trading [just looked at todays trading] —-people may be desperate for money Or be frightened that LVLT will not get the required minimum .
Unless we see some serious vol , I do not think it means anything .
In reviewing the Bloomberg Screen—- Chou has 31.3 mil of the 6s/10 & 13.5 mil of the 6s/09 .
Steelhead has 2.5 mil of the 6s/09 .
Scott & Julian will be tendering about 48 mil of combined 6s/09 & 6s/10 .
Other than that ,I do not know who these alleged friendlies are, who supposedly own the debt . They do not appear on the Bloomberg Screen other than those listed above .
I do not believe this is a done deal—-hoping I am very,very ,wrong.
Is your screen paid subscription?
Either way, can you provide a link or copy and paste the shot?
Are you sure SEAM hasn’t accumulated a big chunk of 10’s?
i think it says something when you can buy these issues at 10% below LVLT’s tender price today. obviously the market is saying they don’t have the 50% across each tranch. i believe even if they fall short they will adjust and take out what they can. dont believe its a done deal either.
Do you ever cover anything other than L3? THe masthead says “Telecom Ramblings” not “I’m obsessed with Level 3 to the point that I write about them all the time.”
You’re a smart guy, with some great insights. How ’bout applying them to the entire Telecom industry? L3 isn’t really that interesting.