Wachovia analyst: do not be charmed by Level 3's results

By Ronda Fears

Nashville, Feb 5 - Jeanine Oburchay, convertible analyst at Wachovia Securities, Inc., warned convertible investors to not be charmed by Level 3 Communications Inc.'s recent results, rather she recommended getting out of the name.

"Level 3 reported mixed results that diehard Level 3 fans seemed to perceive positively," Oburchay said in a report Wednesday.

"We, on the other hand, would continue to be cautious about the name, despite declining debt levels, primarily because of execution risks associated with the story.

"Although we think many investors will perceive the lower debt level and the announcement by management that it would generate free cash flow sooner than expected as positive credit events, we are still wary."

The company ended 2002 with $6.1 billion in debt and $1.5 billion in cash, including $400 million of restricted cash. At the end of the third quarter, Level 3 had $6.3 billion in debt and $1.4 billion in cash.

"Considering the convertibles are junior to the straight debt (at roughly 1,970 bps) and the converts are longer paper, we believe current spreads on the converts may be too tight. Still, we believe some investors may look at the fourth-quarter results as positive news for the credit," Oburchay said.

"Even so, we caution investors that any tightening in the credit spreads is unlikely to be long-lived. We believe investors should continue to avoid the name, or look for any tightening in the spreads to lighten up, or eliminate positions altogether."

The next significant chunk of the company's debt - $3.7 billion - matures in 2008; in 2003 only $180 million in debt is due so 2003 is not a huge concern, she said..

Nonetheless, she added, that "although we do not think Level 3 is a bankruptcy candidate and we believe management has wisely bought itself a lot of time to execute, we believe that such execution is going to be challenging, at best."

In addition, the analyst said any subsequent acquisitions will only make the execution of Level 3's strategy more difficult.

As a result, there may a near-term tightening of credit spreads, she said, noting Level 3's 11% straight bonds due 2008 traded most recently at 64, or a yield-to-worst of 23.44%.

"We believe this is simply a reaction to the realization that the company is not going to go bankrupt and not necessarily evidence that the credit story is growing significantly better," Oburchay said.

Level 3's 6% convertible due 2009, at 45.375, has a current yield of 13.22%, yield-to-maturity of 22.12% and a premium of 485.73% with an implied spread of 1,874 basis points and volatility of 55%. The bond is provisionally callable at 104.025.

Level 3's 6% convertible due 2010, at 40.792, has a current yield of 14.71%, yield to maturity of 23.76% and a premium of 989.21 with an implied spread on these bonds of 1,943 bps and volatility of 55%. The bond is provisionally callable at 104.8.

© 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.