Level 3 -- Tale of Survival in Tough Times

--How could Level 3 still survive without profits and cash flow.... Sign --bond/equity investors should steer clear of this company Sick of stories about failing companies? Here is a tale of a company that has somehow managed to stay alive. In this darkest winter, that should be inspiration enough. Level 3 Communications Inc. was supposed to have died after the last great boom. Sucking up $12 billion in new capital, it assembled a 77,000 mile network of fiber-optic cables, most of it built in the late 1990s and early 2000s. That seemed a sure thing back then. Against the Odds Telecom company Level 3 has managed to survive through the two financial crises of this decade. How? Issued more than 1 billion shares of stock since 2003 to purchase businesses. Use the acquired cash flow to pay down debtTapped a reliable group of original investors and long-time backers, who recently lent the company $400 millionUsed that investment to buy back debt for roughly 73 cents on the dollar, pushing 2010 maturities back to 2013 Soon reality set in for investors: Level 3 wasn't the only one running cable across the planet, and the promised profits never materialized. Since 2001, it has been paying $500 million to $600 million a year in interest. Yet it has never been able to cut its long-term debt load below $5 billion. Even worse, Level 3 hasn't made a penny of profit since 1999. Its stock has traded below $8 for the past eight years. It closed at 98 cents on Monday. Level 3 seemed a prime target to get pulled into today's great credit maw, where decent but otherwise cash-strapped companies go to die. By November, bond investors were seriously doubting the company's ability to pay off $1.1 billion in debt coming due this year and next, valuing its bonds as low as 30 cents on the dollar. Level 3 Chief Financial Officer Sunit Patel was in the offices of Lehman Brothers Holdings Inc. two days before the firm declared bankruptcy on Sept. 15. "The mood was quite poor," he says. "It was evident confidence was fading fast." That would soon have its effect on Level 3, which is based in the Denver suburbs. "We have to deal with upcoming maturities. And when credit markets shut down, it puts corporations like us in a dire position." This is exactly the worry facing hundreds of companies around the country. And it is this dilemma -- as much as the banks themselves -- that should be frightening President Barack Obama and his aides. If otherwise solid companies can't roll over their debt obligations they will fail, costing jobs. Associated Press The campus of Level 3 Communications in Broomfield, Colo. Level 3 is lucky that its top 10 holders control about 70% of its stock. Eventually, the company was able to convince some of these investors -- including Southeastern Asset Management and Fairfax Financial Holdings -- to stump an additional $400 million. About $340 million of that sum was used to buy back $460 million of those looming 2010 maturities. Level 3's debt obligations in 2009 and 2010 are now $694 million, and not $1.1 billion. The reprieve is a costly one. Level 3 is paying 15% annual interest on the money, and the debt converts to stock by 2013, hurting its current shareholders. Bond investors still trade Level 3's paper at about 70 cents on the dollar and the single-digit stock price indicates shareholders expect more deals like these in coming years. Companies and their lenders will have to renegotiate trillions of dollars in debt in the years ahead, in many cases swapping debt for equity. As Mr. Patel learned, it is essential not to bury the problems, but to face them, candidly, early on. "The key is having a long-term relationship with shareholders," he says. "These guys pull rabbits out of the hat," says Jefferies & Co. Inc. credit analyst Romeo Reyes. "They've been shrewd about taking advantage of what the market offers." Surely many other companies won't be as lucky. And who knows whether Level 3 will be able to pay off nearly $4 billion of debt coming due in 2012 and 2013. The market is still skeptical. At this point in the crisis, however, survival is victory. And that should offer some inspiration for managers rebuffed by the banks: If Level 3 can stay in the game, there just may be hope yet. Write to Dennis K. Berman at dennis.berman@wsj.com