On the Level
>On the Level: Level 3 Is Fully Funded. Right
>By Brett D. Fromson
>Chief Markets Writer
>2/27/01 6:47 PM ET
>URL: < http://www.thestreet.com/p/comment/onthelevel/1322230.html
<http://www.thestreet.com/p/comment/onthelevel/1322230.html> >
>Sometimes you just have to smile.
>Take, for instance, tonight's King of Comedy, Level 3
>Communications(LVLT:Nasdaq), perhaps the most aggressive of the big,
>money-losing telecommunications service providers floating on a sea of
debt.
>
>Last year, the company lost $1.5 billion after taxes. There are questions
>about its long-term financial health. And through it all, Level 3's
>management continues to reassure investors that the company is "fully
>funded" to get to break-even. Investors in this beaten-up stock naturally
>find such assurances soothing.
>They shouldn't.
>Late last month, Level 3 filed to sell $3 billion in new debt securities --
>preferred and common stock to finance working capital and capital
>expenditures. Companies that are fully funded do not typically serve notice
>that they may need to borrow another $3 billion to pay bills and make the
>investments required to stay in business.
>Level 3 matters to investors for a number of reasons. First, because it
>represents the entire New Era telco sector, which has seen more speculative
>money thrown at it than any other high-tech sector in the past five years.
>And that is saying something. If Level 3 runs into financial trouble, you
>can bet a lot of other telco services companies will, too. And second, if a
>slow-motion liquidity crisis hits the sector, it will not be good news for
>related industries such as telecom equipment, semiconductor manufacturers
>and contract manufacturers. As bad as the news has been for these
industries
>already, if telecom continues to roll over, the news could get worse.
>(That's for all you folks looking for the bottom in tech.)
>Level 3 is also worth paying attention to because there is a staggering
>amount of money at risk. Here are a few relevant numbers: The company's
>market capitalization is about $10 billion. It carries $7.3 billion in
debt.
>It has about $4 billion in cash that it plans to spend real soon. By
>year-end, cumulative capital expenditures will reach $13 billion to $14
>billion, which is a lot of money for a company that went public only in
>1998. By 2010, cumulative cap ex is expected to top $40 billion. Global
>networks don't come cheap, you know.
>You might reasonably ask, will Level 3 even get to 2003 -- let alone 2010?
>The answer may hinge on whether the company is as fully funded as it claims
>to be.
>Last November, this column raised questions about Level 3's claims to be
>fully funded. Company management was not pleased.
>Robin Miller, Level 3's vice president for investor relations, wrote in:
>"The fact is that Level 3 is one of the few emerging communications
>companies to be fully funded. Level 3 is fully funded through free cash
flow
>break-even, at which point we are obviously self-funding."
>Well, on Jan. 18 of this year, "fully funded" Level 3 filed its $3 billion
>shelf offering. The stock lost $1.70 a share that day to close at $45.30.
>Today, it closed at $26.56.
>Today, we tried to reach Miller by phone to ask why a fully funded company
>like Level 3 would file a $3 billion shelf offering. She was unavailable,
>but Level 3's director of media relations, Paul Lonnegren, was. He said
that
>the $3 billion filing "doesn't necessarily mean that the company has any
>intentions or plans to raise the money. ... It doesn't mean that we are
>going to go back to the market for more cash. ... We are confident we can
>get to cash-flow break-even without having to get more money from the
>market. We project cash flow break-even by 2004. ... We did not file to
>raise more money in case we are not fully funded. It was in case the
markets
>bounce back positively enough to make the cost of money attractive. Of
>course, there are no signs of that happening."
>No, there isn't any sign of the financial markets opening up for the likes
>of Level 3 anytime soon. There was a brief moment in January when the junk
>bond market eased a bit for high-risk borrowers. That was when Level 3
>filed. But today, if Level 3 wanted to raise money in the debt market, it
>would have to pay north of 15% -- if it could get the money at all.
>The idea that Level 3 can ease its debt payment problems by borrowing
>another $3 billion at 15% to 20% is laughable. Such new debt would be more
>expensive than existing debt. And according to the January registration
>statement, the company already had "deficiencies of earnings to fixed
>charges of $997 million for the nine months ended September 30, 2000." If
>Level 3 adds more debt, its debt-service costs simply go up that much more.

>Lehman Brothers' convertible debt analyst Ravi Suria wrote in a report last
>year that "a company [is] fully-funded only if it has enough cash to last
it
>to a point when it becomes capable of paying at least the ... fixed charges
>from internally generated operating cash flow or EBITDA." By this measure,
>Level 3 is not fully funded. If the company were, it would not have filed
to
>borrow another $3 billion to fund operating expenses and the buildout of
its
>network.
>Level 3 management can say anything it wants about the company being fully
>funded. Investors should make up their own minds.
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>----
>Brett Fromson writes daily for TheStreet.com. In keeping with TSC's
>editorial policy, he doesn't own or short individual stocks, although he
>owns stock in TheStreet.com. He invites you to send your feedback to
> bfromson@thestreet.com <mailto:bfromson@thestreet.com>
>
>

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