Level 3 climbs on exchange of 10% convertible; Six Flags improves on parks sale despite skepticism

By Kenneth Lim

Boston, Jan. 12 - Level 3 Communications Inc. jumped higher on Friday, after a debt exchange was seen to improve the company's credit profile and lower its interest expenses.

Six Flags Inc. also gained, despite caution at the ratings agencies after the company sold seven of its parks to reduce its debt burden.

The rest of the convertible market was fairly still, as the bond markets closed early ahead of a long weekend.

"Once the bond market closes, it gets very quiet," a buyside convertible bond trader said.

Level 3 rallies on exchange

Level 3's 6% convertible due 2009 jumped about 2 points on Friday, after the company exchanged $490 million of 10% convertible debt into its common stock.

The 6% convertible was seen at 95.625 bid, 95.875 offered against a stock price of $6.73. Level 3 stock (Nasdaq: LVLT) closed at $6.60, up by 1.85% or 12 cents.

"Right now they're up almost 2 points outright," the buyside trader said.

Level 3 said Thursday that it agreed to exchanged $490 million of its 10% convertible senior notes due 2011 at a rate of 326.78 shares per $1,000 note. That works out to a conversion price of about $3.06.

The conversion rate on the notes was 277.77 shares per note, or $3.60 per share. Southeastern Asset Management and Legg Mason Opportunity Trust were the holders of the notes.

About $390 million of the 10% convertible series will remain outstanding after the exchange. Level 3, a Broomfield, Colo.-based internet backbone provider, said the move will reduce its 2007 cash interest expense by about $47 million.

"It was a nice payout for the holders who were able to turn those in," a sellsider said.

"This is a continuation of a multi-year trend by this company to reduce or equitize the capital structure. It's a testament to their ability to reduce their debt substantially. It didn't surprise many people, but if you're holders of those 10's, it's a home run."

The sellsider said Level 3 has been using its equity to reduce its leverage for the past few years. "Their equity sharecount has exploded the past couple of years," the sellsider said.

The sellsider expects Level 3 to continue the trend.

"It would make sense for them to continue to take down their debt," the sellsider said.

Credit Suisse equity analyst Christopher Larsen raised his 2007 earnings per share estimate to 45 cents from 37 cents after the announcement, and maintained his outperform rating on the stock.

The move will also improve Level 3's cash flow outlook, and will be mildly free cash flow accretive per share, Larsen wrote in a note.

"We are now forecasting positive free cash flow for the company in 2008," Larsen wrote.

A sellside convertible analyst called the move "really positive" for Level 3 from a ratings standpoint. The analyst said Level 3 continues to be an attractive name.

"That was not shocking at all," the analyst said. "They improved their credit by getting rid of some high interest debt. Level 3 has been like one of my favorite ideas for like six months. Because of video, there's been an increase in demand for bandwidth, and they stand to benefit from that."

Six Flags gains amid caution

Six Flags' 7.25% convertible preferred stock gained about half a point on Friday as the stock continued to rally following the company's sale of seven amusement parks to reduce debt.

The preferred closed at 23.51 against a common stock price of $6.21. Six Flags stock (NYSE: SIX) rose 5.25% or 31 cents and ended at $6.21.

New York-based Six Flags, an amusement park operator, said Thursday that it was selling seven of its parks for $312 million. The parks comprise three water parks and four theme parks, and exclude the Magic Mountain park in California.

Six Flags, which had about $2.1 billion of long term debt as at Sept. 3, 2006, will use the money from the sale to reduce its debt.

A sellside convertible bond analyst noted disagreement in the Street over how significant the sale would be for the company.

"I think it's interesting," the analyst said. "There's a lot of debate, and some people are going, 'It's not really going to improve the credit that much.'

"The metrics don't improve that much because they're getting rid of a lot of EBITDA," the analyst said.

But the analyst saw the move as a positive step operationally.

"The real story here...this is not made a big deal of, is that management is narrowing its focus to parks that really mattered," the analyst said. "They're selling these parks so that it gets out of their portfolio, and saves on operational management time here."

"The point about Magic Mountain, is that their Magic Mountain is believed to be super-profitable," the analyst said. "They've managed to keep it, and whether they sell it now or later...it's a good turnaround story."

The analyst said Six Flags was likely to use the money from the sale to reduce its term loan first. Its next priority would be to reduce its revolving debt. The result of that will be to give the company a considerably better liquidity situation in the short term, the analyst said.

"That's a positive from a flexibility standpoint," the analyst said.

But there were also skeptics who were more cautious about the sale's implications.

"It's still a show-me story," a sellside convertible strategist said. "The company has promised a lot the past couple of years and they've tripped up before. They have new management...so maybe this is the year that it all clicks, but I think there are still a lot of operational issues, and it's a highly levered company so if it doesn't work out people could get hurt."

The strategist said that with Six Flags' history, a little caution would not hurt.

"There are people who have been burned multiple times in the past, that's all I'm saying," the strategist said.

Standard & Poor's on Friday kept Six Flags on CreditWatch with negative implications. S&P has a B- corporate credit rating on Six Flags, and said it was concerned that the debt reduction will not reduce pro forma debt leverage.

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