Of course, management will provide a set of numbers that's comparable on an apples to apples basis so everyone can see how things are truly looking. Now we're on the opposite side of that spectrum, with the potential for 1-Month LIBOR to top 5% soon if current trends continues.īecause of the two major asset sales, reported results this year are expected to show significant declines for both revenues and adjusted earnings. For a while, part of the bull case for Lumen was based on low interest rates, as the previous management team was able to cut a lot of debt and refinance a number of borrowings to lower rates. With Sunday's news of OPEC+ oil production cuts, a rise in energy prices could spark inflation fears yet again, pushing rates even higher. Unless the Federal Reserve starts cutting rates rather soon, I don't think the interest rate situation for Lumen will improve in the near term. Lumen Debt Exchange (Company Press Release) Again, that's not a tremendous amount on its own, but every little bit starts to add up in the end. However, the new borrowing features a 10.5% coupon, meaning the current exchange will result in an extra $11 million of annual interest. Based on the early tender results seen in the graphic below, the company will see its total debt come down by more than $600 million. Recently, Lumen did announce a debt swap that will push out the maturity profile of some company borrowings and reduce total debt. An extra $40 million or so in interest may not seem like much, but that's a decent percentage when you consider the midpoint of this year's free cash flow forecast was only $100 million. Should that figure jump a bit in the near term, it could trigger another 25 basis point spread above LIBOR in the rates it is paying on certain borrowings. Additionally, as the company's results have weakened, management expects its leverage ratio to increase. On nearly $8 billion in variable rate debt for Lumen, that's another roughly $22 million in annual interest expense. Since the Q4 report alone, this key rate has risen by another nearly 28 basis points. A good portion of the company's debt is variable rate, based on LIBOR, and just as this key rate was starting to surge, Lumen's major interest rate hedges expired. As the chart below shows, 1-Month LIBOR rates have continued to rise this year, after being at near zero back when 2022 started. However, the overall interest rate situation looks a lot different now than it did when management originally announced those asset sales. As I discussed previously, the two major divestitures that the company made last year reduced the company's revenue and cash flow profile in exchange for eliminating a good chunk of debt from the balance sheet. Free cash flow is expected to be in the range of $0 million to $200 million for the full year, which is a lot less than investors and analysts were hoping for. The latest major leg down came after the company's Q4 report, in which management issued a very disappointing forecast for this year. Today, I want to look at where things currently stand, and discuss what is needed for this stock to truly bottom. After being an income investment dream for some time in a low interest rate environment, the dividend elimination may have been the last straw for many. Shares of the communication services company have lost more than half of their value so far, as investors worry about the cash flow picture and growth situation. One of the worst performing stocks so far this year has been Lumen Technologies ( NYSE: LUMN).
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