Shares of Lumen Technologies (LUMN -3.17%) rose 35.2% in September 2024, according to data from S&P Global Market Intelligence. The increase followed a 66.7% jump in the previous month and a 186.4% gain in July. Lumen kept the trend going by refinancing a large chunk of its corporate debt.
Lumen's debt refinancing
Part of the story here is that Lumen (formerly known as CenturyLink) was on a long losing streak before these summer jumps. Looking back from the end of June, the stock had fallen 91.9% in three years. It doesn't take much of a business improvement to inspire a strong rebound from a market dip of that caliber.
The company's only significant news in September was the aforementioned refinancing. Lumen retired $1.03 billion of debt notes in its own name and another $350 million of debt from Level 3 (which the company acquired in 2017). The debt holders accepted a payoff of less than the full value. The discounts ranged from 2.5% to 30% for the Lumen notes and held steady at 2% for the Level 3 notes.
These old debts came with annual interest rates in the 4% range. Their maturities varied, too, starting in 2026 and ending in 2029.
In their place, Lumen issued $850 million in new debt, secured against the company's assets and due for full repayment by 2032. The annual interest rate of these debt papers is 10%.
In other words, Lumen refinanced about $1.4 billion of debt that was getting close to its expiration dates in exchange for $850 million of new debt. The new debt balance is lower, with a longer expiration period, but it carries much higher interest rates.
Lumen's financial health
Lumen investors embraced the refinancing, driving the stock 34.2% higher from the announcement to its closing two weeks later. However, deals like these don't look like a robust balance sheet repair. Instead, they're often signs of a company in deep financial trouble. Debt owners rarely agree to payoffs far below the original financing terms, and you almost have to be desperate to seek new debt in an era of sky-high interest rates.
The stock is still down 51% in three years, even after the big jumps in July, August, and September. Trailing revenue fell 30% over the same period and free cash flows are 96% lower. Lumen is burning its financial candle at both ends, haunted by a heavy debt load and low-margin telecom networking operations.
On the upside, Lumen recently signed significant fiber networking deals with Microsoft and Corning. The Corning agreement boosted Lumen's intercity network capacity, which will be needed to supply Microsoft's Azure platform with more bandwidth.
So maybe there's some hope for this struggling network services provider, but it's a risky bet. I would rather watch Lumen's turnaround effort from the sidelines.
