Business Context and Reporting Period
This Form 8-K, filed on June 20, 2017, by CenturyLink, Inc. (now Lumen Technologies, Inc.), reports the entry into a material definitive agreement on June 19, 2017. The filing details new financing arrangements established to support the pending acquisition of Level 3 Communications, Inc. The company anticipates closing the acquisition by the end of the third quarter of 2017, subject to regulatory approvals and other conditions.
Key Financial Metrics and Debt Structure
The filing outlines the creation of $9.945 billion in new senior secured credit facilities through a subsidiary, CenturyLink Escrow, LLC. The structure includes:
- Total Facility Size: $9.945 billion.
- New Revolving Credit Facility: $2.0 billion (replacing the current facility).
- New Term Loan Facilities: $7.945 billion, comprised of:
- Term Loan A: $1.575 billion.
- Term Loan A-1: $0.370 billion.
- Term Loan B: $6.0 billion.
- Interest Rates (Post-Acquisition):
- Term Loan A/A-1 and Revolver: LIBOR + 2.25% to 3.00% (or Base Rate + 1.25% to 2.00%), based on leverage ratio.
- Term Loan B: LIBOR + 2.75%.
- Amortization: Term Loan A/A-1 requires 1.25% quarterly amortization; Term Loan B requires 0.25% quarterly amortization.
- Covenants: Maximum total leverage ratio of 5.00:1.00 (up to 2 years post-closing) and 4.75:1.00 thereafter; minimum interest coverage ratio of 2.00:1.00.
The filing does not provide specific revenue, profit, cash flow, or margin figures for the reporting period, as this is a current report regarding a specific transaction rather than a periodic financial statement.
Material Changes and Debt Refinancing
Upon the closing of the acquisition, the new facilities will be used to finance the cash portion of the Level 3 acquisition consideration and to refinance existing indebtedness. Specifically, the company plans to repay and terminate:
- The credit agreement dated April 6, 2012 (as amended) with Wells Fargo Bank, National Association.
- The credit agreement dated April 18, 2012 (as amended) with CoBank, ACB.
Proceeds from the $6.0 billion Term Loan B facility are currently held in escrow pending the closing of the acquisition. Level 3's existing indebtedness is expected to remain outstanding immediately following the transaction.
Outlook, Risks, and Management Commentary
Management expects to close the acquisition by the end of Q3 2017. The new credit agreement imposes significant restrictions on the company's ability to declare dividends, repurchase stock, incur additional indebtedness, or dispose of assets. The filing includes extensive forward-looking statements regarding the transaction's timing and benefits, noting that actual results may differ materially due to various risks.
Key risks identified include:
- Failure to obtain required regulatory approvals for the Level 3 combination.
- Inability to meet conditions for funding the Term Loan A, A-1, and Revolver facilities or releasing Term Loan B funds from escrow.
- Integration challenges and higher-than-expected costs in combining operations.
- Adverse changes in credit market access or debt credit ratings.
- Regulatory changes in the communications industry affecting intercarrier compensation and net neutrality.
Investor Verification Checklist
- Verify the status of regulatory approvals required for the Level 3 acquisition.
- Confirm the final closing date of the acquisition and the subsequent release of Term Loan B funds from escrow.
- Review the definitive joint proxy statement/prospectus (Form S-4) for detailed financial projections and transaction terms.
- Monitor the company's leverage ratio to ensure compliance with the 5.00:1.00 and 4.75:1.00 covenants post-closing.
- Assess the impact of the new debt structure on the company's interest coverage ratio and future cash flow requirements.