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Lumen Technologies Inc.’s “battered” bonds sport “tremendous upside potential” but also “too great” a risk, in the view of one analyst.
David Novosel of Gimme Credit, an independent bond research team, reiterated his sell recommendation on Lumen
LUMN,
in a Wednesday note to clients, with the analyst’s note coming in the wake of a debt exchange that the telecommunications company announced last week. Lumen then offered to issue up to $1.1 billion in new 10.5% Level 3 notes that have a 2030 maturity.
“We believe that extending the hefty maturities in 2025-2027 is the primary motive,” Novosel wrote. “Besides the obvious subordination for unsecured bondholders, deals of this nature are typically ominous for the issuer. It does not have to end badly, but historically it is indicative of some major credit problems.”
He continues to have concerns about Lumen’s positioning and the tough choices likely ahead of the company, which was formerly known as CenturyLink. Lumen has made various asset sales so that it could work toward paying down debt, “but the problem is that the company does not have enough rapidly growing business to offset the shrinking portion,” according to Novosel.
For more: Lumen debt exchange shows beaten-down company plans to ‘fight it out’ amid investor doubts
Lumen has grouped its business revenue into categories named “grow,” “nurture,” “harvest,” and “other,” but Novosel notes that “grow” areas like SD-WAN and SASE contribute about 36% of business revenue, while “nurture” areas like VPN and Ethernet kick in 31% and “harvest” areas like legacy voice make up 26%.
“The latter two units are declining at very high rates,” he said.
Novosel is also worried about Lumen’s free-cash-flow position, noting that the company expects the metric to fall between breakeven to $200 million for 2023. The company’s approximately $20 billion of debt “may be stuck there for a while.”
“It did not help that the company repurchased $200 million of its shares in the fourth quarter,” he added.
There are concerns on Wall Street about Lumen’s ability to effectively invest in its business given its financial pressures. Novosel weighed in on one potential impact in his latest note.
“The extremely weak free-cash flow in 2023 may slow its rollout of Quantum Fiber,” he wrote. “Lumen now intends to roll out to 8 to 10 million locations versus 12 million previously. Part of the cutback is due to a focus on those areas that drive higher profitability.”
From February: Lumen stock sinks to levels not seen since 1988 amid a ‘reset’
Novosel noted that Lumen’s 2029 notes were trading at a price of $51.17 and a yield of 19.1% as of the publication of his report.
Lumen was booted from the S&P 500
SPX,
before the start of trading Monday and sent down to the S&P SmallCap 600
SP600EQ,
where it replaced Bed Bath & Beyond Inc.
BBBY,
Lumen shares ended Wednesday’s session down 1.4%. The stock is off 52% so far this year.
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