Business Context and Reporting Period
This Form 8-K, dated November 29, 2019, reports material definitive agreements and the creation of direct financial obligations by CenturyLink, Inc. and its subsidiary, Level 3 Parent, LLC. The filing details a significant refinancing transaction executed by Level 3 Financing, Inc., an indirect wholly-owned subsidiary of CenturyLink.
Key Financial Metrics and Debt Structure
The filing outlines a major debt restructuring involving the issuance of new term loans and senior secured notes to refinance existing obligations.
- New Term Loan: $3.11 billion Tranche B 2027 Term Loan incurred under an amended credit agreement.
- New Senior Secured Notes:
- $750 million of 3.400% Senior Secured Notes due 2027.
- $750 million of 3.875% Senior Secured Notes due 2029.
- Refinanced Debt: Proceeds were used to prepay in full the existing Tranche B 2024 Term Loan with an aggregate principal amount of $4.61 billion.
- Interest Rates:
- Term Loan (ABR): Prime Rate, Fed Funds + 0.5%, or LIBOR + 1.0% (floor 0%), plus 0.75% margin.
- Term Loan (Eurodollar): LIBOR (floor 0%) plus 1.75% margin.
- Notes: Fixed rates of 3.400% (2027) and 3.875% (2029).
- Fees: An upfront fee of 25 basis points was paid to lenders on the Term Loan.
Material Changes and Covenant Amendments
The Thirteenth Amendment Agreement to the Existing Credit Agreement introduced several material changes to the credit facility terms:
- Covenant Baskets: Increased certain threshold ratios applicable under restrictive covenants.
- Investment Grade Provisions: Modified provisions regarding the suspension of covenants upon obtaining "investment grade" ratings.
- EBITDA Calculations: Changed calculations used to measure EBITDA for covenant compliance.
- Capital Leases: "Frozen" the treatment of capital lease obligations under GAAP.
- Prepayment Premium: Prepayments or repricings of the new Term Loan between the closing date and May 29, 2020, are subject to a 1.00% premium.
Outlook, Risks, and Unusual Items
Security and Guarantees: The new Term Loan and Notes are secured by assets of Level 3 Parent and its material domestic subsidiaries. Level 3 Parent and certain subsidiaries have guaranteed the obligations. Additional guarantees and pledges by Level 3 Communications, LLC are contingent upon obtaining regulatory approvals.
Redemption Terms: Both series of Notes are subject to redemption at the option of Level 3 Financing. Redemptions prior to specific dates (January 1, 2027, for the 2027 Notes; August 15, 2029, for the 2029 Notes) require payment of a make-whole premium plus accrued interest.
Regulatory Risks: The filing notes that certain guarantees and asset pledges are subject to the receipt of applicable regulatory approvals. The Notes were sold to qualified institutional buyers under Rule 144A and non-U.S. persons under Regulation S, meaning they are not registered under the Securities Act of 1933.
Investor Verification Checklist
- Verify the status of regulatory approvals required for Level 3 Communications, LLC and other subsidiaries to guarantee the new debt.
- Review the specific "baskets" and EBITDA calculation changes in the Restated Credit Agreement to assess covenant headroom.
- Confirm the impact of the 1.00% prepayment premium on the company's ability to refinance or repay the Term Loan before May 29, 2020.
- Assess the total interest expense implications of replacing the 2024 Term Loan with the new 2027 Term Loan and fixed-rate Notes.
- Examine the collateral sharing arrangements to understand the priority of these new obligations relative to other senior secured debt.