Lumen Technologies’ recently announced agreement with a group of creditors to address near-term maturities has emboldened a group of creditors left out of the deal to craft a competing proposal, said two sources familiar with the matter.
Earlier this week, the telecom group announced it had reached a deal with a group of creditors that hold over USD 7bn of debt that provides the company with USD 1.2bn in new funding and extends the maturities on some of Lumen’s existing debt.
The deal is supported by over a dozen creditors to subsidiary Level 3 Communications that includes Silver Point Capital and Paloma Partners, the sources said. These funds stand to collect fees in exchange for participating and backstopping the new debt issuance.
The counter proposal offers Lumen alternative financing with what the group believes are better terms, the two sources continued.
“The current deal has a fee of around 20%, so if competing creditors come back with another deal the company has the fiduciary duty to consider it,” said an analyst.
Lumen announced the proposal along with weaker earnings and plans to cut workforce and capex this Tuesday, on Halloween Day, spooking equity investors. The company’s stock has been free falling since then and traded today at USD 0.87 down 40% from USD 1.46 on 31 October.
“Technically the stock shouldn’t have gone down, because the risk of filing is reduced with the deal accepted by the company, but there are concerns about the complexity of the new structure and also weaker fundamentals,” said the analyst, noting that the company has four years to turn things around before it has to face a maturity wall again. “The company also pushed maturities by four years to avoid any further fraudulent conveyance litigation down the line,” he added.
Under the plan announced this week, Lumen will issue USD 1.2bn 11% 1L notes due 2029 with the same guarantors as the 1L term loan facility for Level 3, according to the transaction support agreement.
Proceeds from the new money raised at Level 3 will then be sent up to the parent via an intercompany loan, which increases the complexity of the capital structure and gives Level 3 holders a claim on assets in Lumen’s Qwest subsidiary, noted the analyst. “The deal gives the company more time to turnaround the operations. People are very skeptical, but management wanted that optionality and that's why they went along with the deal," the analyst continued.
The telecom group will also offer holders of existing loans and notes that mature in the coming years the opportunity to exchange into new debt with extended maturities and higher interest rates.
Under the TSA, consenting holders of unsecured Level 3 notes are allowed to exchange up to USD 2bn in debt into Level 3 second lien notes that carry new indentures, 25bps additional interest and maturity dates one year and nine months after the existing notes mature.
Even with the lien, the deal still leaves the unsecured notes at the bottom of a complex capital structure, the sources noted.
The proposal, which is subject to banks agreeing to extend a revolving credit facility and term loan A, further adjusts terms of the debt to eliminate questions on covenant compliance, CEO Kate Johnson told investors on Lumen’s 3Q23 earnings call Tuesday.
Some market participants fear that the debt-laden telecom company is just "rearranging deck chairs" without materially improving the odds to prevent a default in the future, said the sources.
Guggenheim Securities and Wachtell are advising Lumen, while the creditors who struck the TSA are advised by Davis Polk and Houlihan Lokey.
The group of creditors crafting the competing proposal is advised by Gibson Dunn and Evercore. A third group of unsecured holders at the Level 3 subsidiary are advised by Moelis and Akin Gump.
Total revenue at Lumen fell 17.1% year-over-year in 3Q23 to USD 3.641bn, according to the company’s release. Adjusted EBITDA plunged 37.9% year-over-year to USD 1.049bn.
“The asset sale, tax refund, and now the debtholder agreement are providing meaningful relief for the company,” analysts at TD Cowen said in a note this week. “That said, the enterprise business still shows fundamental erosion with EBITDA weakness, [..] and we remain on the sidelines until we see more proof points and visibility in an operational turnaround.”
Lumen’s USD 3.9bn TLB due 2027 was last quoted today at 68.46/70.43 compared to quotes at 71.167/72.333 before the deal was announced, according to Markit. It’s USD 1.25bn 4% notes due 2027 last traded at 58.125 down from 66 on 17 October, according to MarketAxcess.
Lumen, Silver Point, Paloma, Gibson Dunn and Evercore did not return requests for comment.
