Wachovia analysts: Level 3 may not have enough liquidity through 2003

By Ronda Fears

Nashville, Tenn., Aug. 22 - Although Level 3 Communications Inc. got some breathing room with its new bank facility, the company may not have enough liquidity to last through 2003, according to a report Monday by convertible analysts Jeanine Oburchay and Brian Park at Wachovia Securities, Inc.

"We estimate the company's current cash balance at something close to $1.5 billion. Previously, management indicated it expected to end the year with $1.3 billion in cash. However, with higher interest expenses, we are not convinced this is the case," the analyst said in the report.

"These [bank facility] amendments provide Level 3 with increased flexibility and allow it to stop making what we believe are nonsensical acquisitions outside of the core business.

"However, we are concerned that with the new limits on Level 3's cash balance and its lower availability on its revolver, the company may not have enough liquidity to last it through 2003."

On Friday, Level 3 announced it had amended terms of its credit facility, easing covenants and reducing restrictions on cash acquisitions but also reducing availability, setting a cash requirement and increasing borrowing costs. It also said it was funded to the point where it expects to be free cash flow positive.

The credit facility had been $1.775 billion, consisting of $1.125 billion in term loans and $650 million in an undrawn revolver. Previously, the covenant associated with this facility required Level 3 to maintain at least $1.5 billion in telecom revenue for the trailing four quarters.

In exchange for the amendment, the revolver was lowered to $150 million, the company must maintain a cash balance of $525 million and Level 3's cost of borrowing increased 0.5%.

Level 3 said the change will increase flexibility and allow it to make acquisitions as the telecom sector consolidates.

The amendment gives Level 3 greater ability to make acquisitions for cash.

Minimum telecom revenue and total debt to telecom revenue covenants were removed.

The total leverage ratio covenant, using total debt to adjusted EBITDA, will now apply on a 12-month trailing basis beginning on June 30, 2004, with a maximum allowable level of 11.5 times, versus the original credit facility with a maximum allowable level of 6.0 times beginning on Dec. 31, 2004.

In return, Level 3 agreed to a $500 million reduction in its undrawn $650 million revolving credit facility, lowering its size to $150 million, with restrictions on availability.

Of the $150 million, $50 million is available immediately for letters of credit while the remaining $100 million becomes available after a year subject to Level 3 passing certain financial tests.

The company will also be required to maintain a minimum cash balance, generally $525 million.

The interest rate Level 3 will pay was raised by 50 basis points.

Level 3 also increased the collateral pledge to lenders and accepted limitations on its ability to buy back debt for cash and to incur some types of debt and liens.

Level 3 noted it remains fully funded to free cash flow breakeven. At the end of the second quarter it had $1.55 billion in cash, including the $500 million in junior convertible subordinated notes sold in July 2002.

Level 3 sold $100 million of the new notes to Berkshire Hathaway, $300 million to Longleaf Partners and $100 million to Legg Mason. All three investors have agreed to consider investing more in the future, without obligation.

The notes have a 9% coupon and 18% initial conversion premium.

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