Notes:

1. Under the RCF/TLA Credit Agreement and commencing with the fiscal quarter ended 30 June 2024, Lumen may not permit (i) maximum total net leverage ratio to exceed 5.75 to 1.00 as of the last day of each fiscal quarter, stepping down to 5.50 to 1.00 with respect to each fiscal quarter ending after 31 December 2024 and stepping down to 5.25 to 1.00 with respect to each fiscal quarter ending after 31 December 2025; or (ii) its interest coverage ratio as of the last day of any test period to be less than 2.00 to 1.00.
2. As of 31 March 2024, Lumen Technologies, Inc. believed it and its subsidiaries were in compliance with the provisions and financial covenants in their respective material debt agreements in all material respects.

Recent Events 

On 20 February 2024 Debtwire reported that Moody’’s downgraded LUMN’s CFR to Caa2 from Caa1.

On 22 March 2024, Debtwire reported that LUMN completed its previously disclosed and amended transaction support agreement.  On the same day Debtwire reported that S&P downgraded LUMN to SD from CC based on the previously reported transaction.

On 4 April 2024, Debtwire reported that S&P had upgraded LUMN to CCC+ from SD.

On 9 April 2024, Debtwire reported that Moody’s downgraded various LUMN unsecured notes due to diminished rights and collateral in the wake of the previously reported transaction.

On 30 April 2024, LUMN reported 1Q24 results after market close. Reported revenue of USD 3.3bn missed our estimates for USD 3.5bn.

Financials

Prior period comparisons for LUMN remain clouded by recent meaningfully large divestiture activity. Bridge details are noted where available and disclosed by the company.

LUMN reported total revenue of USD 3.3bn for 1Q24 versus USD 3.7bn for 1Q23. Approximately 34% of the total revenue decline, or approximately USD 168m was due to divestitures. Business segment revenue was down ~13% YoY and Mass Market segment revenue was down ~9% YoY inclusive of the divestitures. Management suggested on the 1Q24 call that news of the balance sheet restructuring transaction and uncertainty as to success translated to revenue headwinds in the quarter.

Fiber broadband subscribers grew to 952,000, up 11% from 1Q23 and 2% from 4Q23. Fiber broadband ARPU remained flat YoY and QoQ at USD 61. Total Fiber broadband enabled units grew to 3.8m, up 15% from 3.3m a year ago and up 3% from 3.7m last quarter. For 1Q24, 25% of Fiber enabled units were active Fiber broadband subscribers, down from 26% a year ago and flat with 4Q23 levels.

Operating margin for 1Q24 was 1% versus 10% in 1Q23. Cost of service and products for 1Q24 came in at 50% versus 49% a year ago and SG&A as a percentage of revenue grew to 25% for the most recent quarter versus 19% in the year ago period.  LUMN’s cost structure was not able to absorb YoY revenue declines. As noted, YoY apples-to-apples comparisons remain difficult, but should be less impacted by M&A activity in FY2024.

Total Adj. EBITDA for 1Q24 was USD 977m, down from USD 1.3bn in 1Q23. Approximately 22% of the total Adj. EBITDA decline, or approximately USD 61m, was due to divestitures. The remainder was due to declines in revenue and fixed costs, which remain meaningful in this business, and also the gain on sale benefit in 4Q22. On the 1Q24 call, management suggested that the quarter would represent a low point for EBITDA for FY2024.

Levered free cash flow was USD 389m for 1Q24 versus negative USD 45m for 1Q23, attributable to higher cashflow from operating activities in the current period, partially offset by slightly higher capex. As noted above, YoY apples-to-apples comparison remains difficult. The 1Q24 period also benefited from a ~USD 700m tax refund receipt.

Management guided to FY2024 Adj. EBITDA in the range of USD 4.1bn to 4.3bn, capex in the range of USD 2.7bn to 2.9bn, and free cash flow in the range of USD 100m to 300m, consistent with FY2024 guidance provided with the 4Q23 release. Our NTME estimates assume 2% sequential revenue declines for the next four-quarters, 31% Adj. EBITDA margins, and capex in line with 1Q24 levels. The tables below reflect the available information provided on an historical basis as part of the 4Q23 release.

The company managed to significantly shift its balance sheet around by way of the multi-faceted refinancing transaction. The following graphic from the earnings presentation nicely highlights the total impact. Management noted that the transaction will add approximately USD 200m to annual interest expenses, lower than our prior estimate for a USD 330m increase.

Valuation

LUMN is currently trading at an NTME EV/EBITDA multiple of 4.9x, versus a peer average of 6.6x. Total leverage is 5.0x, compared with a peer average of 5.5x. Net leverage is 4.6x, versus a 5.1x average of the peers.

LUMN’s secured debt appears fully covered. LUMN’s unsecured debt is likely impaired and perhaps significantly so if the company underperforms expectations. That being said, the longer dated junior paper already trades at levels that reflect a very negative view of recoveries.  The company appears to have enough liquidity to address near-term maturities, and the longer dated higher coupon / lower dollar price unsecured paper is potentially compelling for parties who believe LUMN can stay alive in its current form into 2028/2029 when the contemplated new capital structure will likely face another important decision point. If the company is not able to improve financial performance, we believe additional balance sheet gymnastics might be on deck before this new maturity wall, and perhaps a proper restructuring. LUMN’s equity remains option value at this point, but also given the low dollar price and that the equity represents a sliver inside a capital structure that is valued at a relatively low dollar value and multiple, it also could represent meaningful upside potential, especially if LUMN rerates to valuation multiples more in line with its comparable group. Given the volatility in the equity, a covered call strategy (using long-term calls against the equity) might be the most attractive approach for parties looking to trade the situation.

Notes:

1. Does not assume LUMN draws on its estimated revolver capacity.
2. Assumes bankruptcy related expenses of 5% of total debt.

Overview

Lumen Technologies, Inc. (NYSE: LUMN) (f/k/a “CenturyLink, Inc.”) offers products and services to business and retail (mass-market) customers that provide access, connectivity, and related solutions to facilitate and optimize digital communication.