Level 3 Communications, Inc. (Nasdaq:LVLT) today issued the following statement, which can be attributed to James Q. Crowe, chief executive officer:
"On Jan 29, 2002, we issued a news release that included the following:
'Level 3 has a $1.775 billion Senior Secured Credit Facility and is in compliance with all terms and conditions under this facility as of December 31, 2001. Based on first quarter 2002 projections, the company also expects to be in compliance as of the end of the first quarter. If the current rate of sales, cancellations, and disconnects were to continue, the company may violate a revenue-based financial covenant as early as the end of the second quarter. To the extent the company's operational performance improves or it completes acquisitions that generate additional revenue, a potential violation of the covenant could be delayed beyond the second quarter of 2002 or eliminated entirely.'
"This statement has obviously caused concern on the part of a number of investors, which has been further exacerbated by press reports that seem to indicate that Level 3 was giving some sort of implied notice of an impending filing for protection from its creditors under the federal bankruptcy statutes. This speculation is no doubt fueled by the spate of bankruptcy filings in the telecommunications sector, including two this very week.
"This is an incorrect interpretation of our statement. I believe our situation is markedly different and financially much better than the companies in our sector that have sought bankruptcy protection.
"In the fall of 1999, Level 3 finalized an agreement to borrow money from a group of financial institutions, primarily commercial banks. This 'senior secured credit facility' agreement provided for both a term loan that today is fully drawn or borrowed at $1.125 billion and a $650 million revolving loan (that is, a loan that can be borrowed, repaid and re-borrowed over its term) which today has yet to be borrowed.
"The bank agreement contains several terms that Level 3 agreed to in return for receiving the loans. Since the institutions loaning the money are keenly interested in being repaid, a central part of the agreement is the terms and schedule of interest and principal payments.
"As is customary for these credit facilities, Level 3's senior secured credit facility agreement includes a series of provisions, called covenants, that generally identify actions that Level 3 is not permitted to take without prior bank approval, and certain levels of financial and operational performance that Level 3 must achieve or maintain to demonstrate the financial and operational health of the business. The covenants in Level 3's agreement include covenants relating to network construction milestones, minimum revenues and limitations on incurrence of additional debt.
"Since, as this past year has demonstrated, unforeseen events do occur, the agreement specifies the process by which covenants can be modified or waived, generally to address conditions that were not anticipated at the time the original agreement was completed. For modifications and waivers considered central or core to the intent of the agreement, such as payment schedules and interest rates, the agreement requires - in addition to the approval of Level 3 - the affirmative vote of 100% of the lenders. For other non-core covenant modifications and waivers, including covenants designed to measure the financial performance of the business, the agreement requires, in addition to the approval of Level 3, an affirmative vote of lenders having more than 50% of the commitments to make loans to Level 3.
"As is common with such agreements, Level 3 and the lenders have concluded a variety of covenant modifications and waivers. Just this past month, the company and the lending banks agreed to a covenant waiver to allow for the sale of certain of Level 3's Asian operations.
"The covenant referenced in the January 29th news release is commonly referred to as the Minimum Telecom Revenue covenant.
"The Minimum Telecom Revenue covenant is calculated on a quarterly basis based on revenue for the prior four quarters. The covenant specifies a minimum of $1.5 billion in telecom revenue as of year-end 2001. The required covenant level grows to $2.3 billion by year-end 2002.
"Based on the fourth quarter results Level 3 announced on January 29th, including the asset impairment charge that was described in detail at that time, Level 3 is in full compliance with all covenants under the senior secured credit facility.
"Based on the company’s first quarter projections that were also announced on January 29th, we expect to be in full compliance with all covenants for the first quarter.
"It is possible that, if our current rate of sales and current rate of both cancellations and disconnects continue, we may have a covenant violation with respect to the Minimum Telecom Revenue financial covenant later this year. A potential financial covenant violation could occur after the second quarter, depending on our results during that quarter. However, to the extent Level 3's operational performance improves, or Level 3 completes acquisitions that generate sufficient incremental cash revenue that meets the requirements of the Minimum Telecom Revenue covenant, Level 3 may never violate this covenant.
"It is also worth noting that if we were to violate the Minimum Telecom Revenue covenant, this would be considered a financial covenant violation, which we believe is far less serious than a potential payment violation. We believe that the company's ability to service its debt, absent economic improvement, has been enhanced significantly over the course of the past year as we've restructured the balance sheet, sold our Asian operations, and reduced expenditures in line with revenue. As a result, we do not anticipate any scenario whereby we would risk a payment violation.
"Recognizing, however, that we might violate a financial covenant later in the year under certain scenarios, we have begun discussions with JP Morgan Chase, the administrative agent for our senior secured credit facility, to assess appropriate modifications to the senior secured credit facility agreement. As is customary for these kinds of amendments, banks look for several concessions in exchange for these modifications, including reductions in principal, higher interest rates or changes to other terms of the agreement.
"We believe we will be able to resolve these issues prior to any covenant violation.
"A number of parties have asked why Level 3 is different from other companies in our sector that gave notice of potential covenant violations and in very short order filed for protection from their creditors under the Federal bankruptcy laws.
"We believe that there are clear differences between our company and those that have sought bankruptcy protection. These differences include:
"Over the past year we have reiterated our conviction that the services we sell are a fundamental part of the US and global economy. Although the timing is hard to predict with accuracy, the current lack of investment in our industry, we believe, will lead to an imbalance between supply and demand in the foreseeable future.
"Our goal has been, and continues to be, to ensure that Level 3 has the operational and financial strength to take advantage of the opportunities that are sure to be available as our economy begins to rebound. I am confident that we are in just such a position."
About Level 3 Communications
Level 3 Communications, Inc. (NASDAQ: LVLT), an international communications company, operates one of the largest Internet backbones in the world, connecting 180 markets in 18 countries. The company serves a broad range of wholesale, enterprise and content customers with a comprehensive suite of services including: Internet Protocol (IP) services, broadband transport and infrastructure services, colocation services, voice and voice over IP services, content delivery and media distribution services. These services provide the building blocks to enable Level 3’s customers to meet their growing demands for advanced communications solutions. The company’s Web address is www.Level3.com.
"Level 3 Communications,” "Level 3," the red 3D brackets and the Level 3 Communications logo are registered service marks of Level 3 Communications, LLC in the United States and/or other countries. Level 3 services are provided by wholly owned subsidiaries of Level 3 Communications, Inc. Any other service, product or company names recited herein may be trademarks or service marks of their respective owners.
Forward-Looking Statement
Some of the statements that we make in this press release are forward looking in nature. These statements are based on management’s current expectations or beliefs. These forward looking statements are not a guarantee of performance and are subject to a number of uncertainties and other factors, many of which are outside our control, which could cause actual events to differ materially from those expressed or implied by the statements. The most important factors that could prevent us from achieving our stated goals include, but are not limited to our ability to: successfully integrate acquisitions; increase the volume of traffic on our network; defend our intellectual property and proprietary rights; develop new products and services that meet customer demands and generate acceptable margins; successfully complete commercial testing of new technology and information systems to support new products and services; attract and retain qualified management and other personnel; and meet all of the terms and conditions of our debt obligations. Additional information concerning these and other important factors can be found within Level 3’s filings with the Securities and Exchange Commission. Statements in this press release should be evaluated in light of these important factors. Level 3 is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.
