Lumen Earnings: Debt Restructuring Looks Like a Sign That Struggles Will Continue

Lumen LUMN was busy in the third quarter, finalizing the divestiture of its European business and restructuring a chunk of debt. Lackluster operating results were consistent with what the new management team has foreshadowed, but encouraging signs are not yet apparent. We believe the company remains undervalued, but the threat of insolvency continues to grow as the debt restructure buys time but otherwise puts the firm on weaker financial footing. In addition, management’s sensing a need to take an otherwise unfavorable deal so that it could extend maturities leads us to believe recent trends will persist. We are changing our uncertainty rating to Extreme and reducing our fair value estimate to $1.50 from $5, which balances the value we believe Lumen has with its precarious current financial and operating positions.

Lumen reached an agreement with creditors holding more than $7 billion in Lumen debt (more than one third of the total) that will push back maturities and provide the firm with an additional $1.2 billion of debt financing. Lumen gets breathing room from 2027 maturities, but the higher level of interest payments will require the firm to cut back on capital spending that management had previously lauded. We find it troubling that management felt this move was necessary. We now don’t expect Lumen to face required refinancings until 2029, by which time we expect Lumen to have either successfully stabilized its business or realized that strategic alternatives are its only option.

The reduction in capital spending will take the form of fewer new homes passed with fiber than the firm previously anticipated. Management now intends to hold steady at about 500,000 new homes passed annually rather than accelerating from that level. The $200 million-$300 million in savings will go to interest payments. This should slow the acceleration in fiber broadband revenue, which is the only growth component of the firm’s consumer-dominated mass markets business.