Last week, Level 3 Communications (NYSE:LVLT, news, filings) wrapped up its refinancing activities just as 2008 came to an end. With a new COO, an improved balance sheet, and the December layoffs probably complete as well, the company can start the new year with a fresh (though perhaps not clean) slate. While we won’t know what Q4 looks like for a while yet, let’s try to summarize where the company seems to stand afterthe refinancing.
Debt maturities:
2009: $182 of 6% converts
2010: $515M total ($319 of 6%, $181M of 2.875%, $15M of 11.5%)
Cash & equivalents (unrestricted):
As of 9/30: $587
Paid for tenders: $336M
Raised by 15% converts: $400M
Pro forma 12/31: $651M
So they have debt maturities over the next two years of $697M and cash of $651M. Given that the company seems to have reached FCF positive status and that Q4 is usually a good working capital quarter for them, they are likely to be closer to $700M with more to generate before anything actually comes due. Enough? Maybe, but it’s too tight still. They will surely raise more cash the moment an opportunity arises, although that may not be for a while.
Operationally Level 3 looks set to have a much healthier year in 2009. The systems integration onto the Unity platform will theoretically finish by summer, and overall they seem to have regained their footing when it comes to installations and order management. Of course, it won’t be hard to top 2007 and 2008 in terms of operational health, a third ‘rebuilding year’ would really hurt. Already it seems that SG&A, high levels of which I obsessed over early in the year, has come down steadily and seem likely to drop further after the new headcount reduction and some expected further network consolidation. Adjusted EBITDA margins might even edge toward 30% late in 2009 if the stars align. It is hard to predict their EBITDA range for 2009 until we see Q4, but given Q3 levels and the savings we have been led to expect, a floor of $1100M seems to be a reasonable expectation in an ugly economy.
Yet, with the economy swirling downward, where does that leave sales growth for 2009? Well, I guess the markets have already voted on that for the sector as a whole. Sales growth is expected to be horrible sector-wide, certainly single digits and probably low ones – I doubt that expectations for Level 3 will be that much different and I see little motivation for any company to be publicly optimistic in such dangerous times. But those who do the best will be those with more fiber and therefore stickier customers and lower churn to worry about.
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rob; nice summary. happy new year btw. ill post and updated model for Q4shortly. the model for Q1/FY09 will be a bit less complex, at least the one i post here, as it seems that last bit of analysis is too much. i would add that im going to model 5% growth in cns and keep sbc runoff on par with other. finally ill keep wvs flat for the year. ill send it shortly. take it easy.
rob, I think the other part of the cash / debt refi equation is the continued buybacks. Looking at the terms of the money raised in the Walter Scott round, continued debt buybacks would be a use of funds. The price of debt has come off a bit since the tender is behind us and the debt is trading at 73c on the dollar. You also might expect spreads to widen again as the market spike & associated debt tightening might not last forever.