By Ronda Fears
Nashville, Nov. 11 - Level 3 Communication Inc.'s newest convertible, its 2.875% issue, provides equity exposure while the company's two 6% issues have more credit-oriented features, said Lehman Brothers analysts in a report Tuesday. But, they noted that the 2.875s are trading rich and the 6s are not at compelling levels either.
The 2.875s are a substitute for investors more sanguine about the recovery in the stock while moving up in the capital structure, said Venu Krishna, head of U.S. convertible research at Lehman.
Level 3's 6% convertibles - due Sept. 15, 2009 and March 15 2010 - have little equity sensitivity and are more appropriate for credit-oriented investors, he said, but the subordination spread is not wide enough to offer compelling enough value relative to Level 3's straight debt.
The convertibles were scrutinized, he noted, following initiation of equity coverage of Level 3 stock by Lehman Brothers analyst R. Dale Lynch.
Total short and long-term debt, including the three convertible issues, at Sept. 30 stood at $6.09 billion, he noted, and the company continues to reduce debt.
With respect to the two 6% convertibles, Level 3 has retired some $459 million of the 2009s and $337 million of the 2010s to date, largely via debt for equity swaps.
Both 6% convertibles are currently busted, with the 2009 issue offering a 13.9% yield to maturity and 742% premium while the 2010 issue offers a 13.7% yield to maturity and a 1,617% premium. By comparison, the 2.875% convertible senior notes, issued in July, are more equity sensitive, offering a 2.9% current yield and 35.1% premium.
"Valuations on the two 6% converts at current levels appear fully valued to slightly cheap and the current spread discount of 110 - 158 bps relative to the straight debt reflects their subordination discount," Krishna said.
"The 2.875% senior converts by comparison, are trading moderately rich on both a valuation basis and implied spread basis. However, given the lower conversion price ($7.18) on these converts, they represent more of a play on the equity value of Level 3.
"In fact, the 2.875s are fairly equity sensitive with a delta of around 80%. We also highlight the 2.875's senior unsecured status, which effectively allows investors to gain equity exposure while moving up in the capital structure."
Given these attributes and a yield pick up of 286 bps on a current-yield basis, the 2.875s are worth considering as an equity substitute by investors who are more sanguine about recovery in Level 3's stock value, he said.
For credit-oriented investors the 6s of 2009 appear interesting given their low dollar price and wider spread. However, it was added that the subordination spread is not wide enough to offer compelling enough value relative to Level 3's straight debt.
Level 3 6% convertible due 2009
| Price: | 69
|
| Stock price: | $5.34
|
| Amount outstanding: | $364 million
|
| Fair value: | 70.22
|
| Current yield: | 8.7%
|
| Yield to maturity: | 13.9%
|
| Premium: | 742%
|
| Spread: | 1,043 bps
|
| Ratings: | Ca/CC
|
| Call: | Provisional if stock over $91.66
|
|
|
| Level 3 6% convertible due 2010
|
| Price: | 68
|
| Stock price: | $5.34
|
| Amount outstanding: | $525 million
|
| Fair value: | 67.9
|
| Current yield: | 8.8%
|
| Yield to maturity: | 13.7%
|
| Premium: | 1,617%
|
| Spread: | 1,000 bps
|
| Ratings: | Ca/CC
|
| Call: | Provisional if stock over $188.78
|
|
|
| Level 3 2.875% convertible due 2009
|
| Price: | 100.5
|
| Stock price: | $5.34
|
| Amount outstanding: | $373.8 million
|
| Fair value: | 99.58
|
| Current yield: | 2.9%
|
| Yield to maturity: | 2.8%
|
| Premium: | 35%
|
| Spread: | 845 bps
|
| Ratings: | Caa2/CC
|
| Call: | July 2007 at 100
|
|
|
© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere.
For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.
