ComplianceNot only will CorpSoft greatly improve Level3's sales outlook -- albeit with services other than the sale of communications bandwidth -- it buys the telco some bargaining power with creditors. As it turns out, Level3 has access to $650 million in credit, as long as the company satisfies one major requirement of its lenders: maintaining a minimum quarterly revenue rate.
|Splendid Splinter? |
Williams unit since spinoff
"This deal makes a lot of sense for them," says CIBC World Markets' analyst Tim Horan, who has a hold rating on Level3. CIBC has no underwriting ties to Level3. "Their old business model wasn't working. Now they will have more leverage when they negotiate with their creditors." The CorpSoft deal will help the company "remain in compliance with the terms and conditions of our credit facility until the second half of 2003," said Level3 CFO Sureel Choksi in a press release. The company hastens to point out that the acquisition fits the definitions set out in its debt covenants, even if software sales strike some observers as a bit off the beaten path for a bandwidth seller. Seasoned Wall Street observers say they know when revenues are being bought, and this deal has all the markings. Is Level3 on the level about the deal? "That question presumes we did something sneaky, but what we have is a contract between Level3 and a set of banks," said a company spokesman. "As the management team we are paid to live up to everything that's been agreed to. Were revenues a consideration? Yes. Was it the only consideration? No." But anything goes nowadays in the telecom sector, considering the carnage that has littered the landscape in recent months. With the collapse of Global Crossing, McLeodUSA, 360Networks and Mpower Communication, and the teetering of Williams, XO and Metromedia Fiber, the clock is ticking extra loud for the few outfits still standing, such as Level3 and Broadwing. For its part, Broadwing saw its outlook turn even gloomier Monday when Moody's cut the company's credit rating, which was already below investment grade, by another two notches. The agency cited concerns that the telco faces greater-than-expected challenges in a difficult market. Broadwing comprises Cincinnati Bell's local phone service and a national fiber optic long distance network. Broadwing has posted two consecutive quarters of declining broadband revenues, a bad sign given the amount of cash the company invested in its fiber optic network. Not only are credit ratings and liquidity pressures mounting, but Level3 and Broadwing also stand to face an even more competitive market should Williams wipe its debt slate clean and continue operation with lower overall costs. "This will end up putting more price pressure on Level3," says CIBC's Horan, whose firm has a hold rating on Williams Communications and Broadwing.