In the view of one analyst, Lumen Technologies Inc. s battered bonds have great upside potential but also too great a risk.
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 company announced last week. Lumen offered to issue up to $1.1 billion in new 10.5% Level 3 notes that have a maturity of 2030.
The primary motive is to extend the hefty maturities in 2025 -- 2027, according to Novosel. Deals of this nature are typically ominous for the issuer, besides the obvious subordination for unsecured bondholders. It doesn't have to end badly, but historically it is indicative of major credit problems. He continues to have concerns about Lumen positioning and the tough choices ahead of the company, which was formerly known as CenturyLink. Lumen has made various asset sales so that it can work toward paying down debt, but the problem is that the company doesn't have enough rapidly growing business to offset the shrinking portion, according to Novosel.
Lumen debt exchange shows beaten-down company plans to fight it out amid investor doubts.
Lumen has grouped its business revenue into categories like grow, nurture, harvest, and other, but Novosel notes that SD-WAN and SASE contribute about 36% of business revenue, while nurturing areas like VPN and Ethernet kick in 31% and harvest areas like legacy voice make up 26%.
He said that the latter two units are declining at very high rates.
Novosel is worried about Lumen's free-cash flow position, and the company expects the metric to fall between breakeven to $200 million for 2023, according to Novosel. The company has around $20 billion of debt that may be stuck there for a while. He said that the company repurchased $200 million of its shares in the fourth quarter.
There are concerns on Wall Street about Lumen's ability to invest in its business, given its financial pressures. He said that the extremely weak free-cash flow in 2023 may slow the rollout of Quantum Fiber. Lumen is planning to roll out to 8 to 10 million locations, compared to 12 million previously. Part of the cutback is due to a focus on areas that drive higher profitability. From February to February, Lumen stock fell to levels not seen since 1988 amid a reset by Novosel. 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 to the S&P SmallCap 600 SP 600 EQ, where it replaced Bed Bath Beyond Inc. BBBY,
Lumen shares ended Wednesday s trading down 1.4%. The stock is down 52% this year.