A couple of weeks ago, I detailed how communication services company CenturyLink (CTL) had made more progress on its debt situation. The firm was able to use a $1.2 billion debt offering to refinance some of its Level 3 subsidiary’s debt, bringing down its interest costs and pushing back some debt maturities a number of years. As the quarter wrapped up, the company announced another debt move, which, when combined with progress made during the quarter, will certainly help the bottom line.
In the above article, I mentioned that in a separate transaction, CenturyLink’s Qwest unit had issued notices to redeem $200 million of its 6.875% notes due in 2054. That process was wrapped up earlier this week, and the company went a step further, announcing that it would redeem the other $300 million of this debt in early August. In total, this will save more than $34 million in pre-tax interest costs, although the realized savings might not be that much if the company is using some of its credit facilities with lower rates to do this. Here’s a quick summary of the total progress made in Q2:
- Per the 10-Q filing: On April 1, 2020, company paid at maturity $973 million aggregate principal amount of CenturyLink’s outstanding senior notes, utilizing cash borrowed late in the first quarter of 2020 under the revolving credit facility.
- The $1.2 billion offering at a 4.25% coupon will be used for redemption of all $840 million of outstanding 5.375% senior notes due in 2022, and $360 million of its outstanding 5.625% senior notes due in 2023. The redemption is expected to be finalized on July 15th.
- Above-mentioned Qwest transactions, one that cleared this week and one to go through on August 7th.
Management’s moves here are only one half of the equation. At the end of Q1, CenturyLink had more than $7 billion in unhedged variable rate debt on the balance sheet. As I’ve discussed previously, the coronavirus pandemic led to a fall in global interest rates, and that was especially true with LIBOR rates that the company is dependent on. Some investors might have thought that improving economic data in recent weeks would have sent these rates back up, but they actually have remained steady in recent weeks as seen below. The 1-month LIBOR rate finished Q2 at a little more than 16 basis points, down 83 bps for the quarter, with the 3-month finishing at 30 bps, down 113 basis points for the period.
(Source: St. Louis Federal Reserve; chart data delayed one week. For an updated quote, click here)
Over the last six quarters, CenturyLink has reduced its quarterly interest costs from $557 million to $449 million. Given the transactions completed during Q2 plus the drop in LIBOR rates, I now think it is somewhat possible that we’ll see quarterly interest with a 3-handle later this year unless we see LIBOR rates rise a bit again. With a greater portion of the company’s free cash flow likely coming in the back half of the year, it’s possible we’ll also see another debt repaid, or at least another refinancing transaction. These moves all help with net income and cash flow, and getting the debt pile down will also eventually help reduce the spread the company pays above its interest rate benchmarks on certain borrowings.
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In the end, CenturyLink was able to finish the second quarter with another solid debt move. The company announced it was going to redeem the remaining $300 million of Qwest notes that weren’t due for more than three decades, adding to multiple moves already made in the period. With these refinancing transactions plus lower LIBOR rates, interest costs will continue to come down, helping the bottom line. At the same time, investors are getting a more than 10% annual dividend yield – a tremendous amount of income that becomes safer and safer with each further smart debt move.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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