In a recurring theme that has been in play since the divestiture of AT&T that spun off US West, Lumen finds itself facing financial challenges. The simplest explanation for the current problems is that higher interest rates have impacted a significant portion of Lumen’s debt – a story that a lot of ISPs in the industry know too well.
Lumen has taken some major steps to alleviate the problem. At the end of the third quarter, Lumen CEO Kate Johnson announced some restructuring with current debt holders to extend the due dates of some debt to ‘reduce the noise” around the company’s debt. The company is also eliminating staff to reduce expenses by $300 million annually. As part of the restructuring, Lumen got access to an additional $1.2 billion in financing.
The market wasn’t entirely accepting of the new structure. For example, the ratings agency Fitch downgraded Lumen’s debt in November from B- to CCC and placed the company on a negative watch. In case you’ve never read a ratings report, you’ll probably find the Fitch report to be interesting. Fitch is concerned about Lumen’s ability to have enough earnings to cover $1.8 billion of debt that is due in 2025 and $9.5 billion in debt that matures in 2027. Fitch worries about Lumen’s ability to meet or refinance those debts as needed.
Fitch acknowledges that Lumen has a strong competitive position, and that the company has a larger enterprise business than its competitors, both in the U.S. and abroad. Lumen has revenues similar to Verizon, but with a smaller expected EBITDA ratio of around 30% of revenues. In the third quarter earnings call, CEO Johnson said that Lumen has been getting a lot of traction in selling new services to existing customers. This includes SASE (secure access service edge) and unified communications.
Lumen’s revenues dropped over 17% compared to 2022, but a large part of that drop comes from its spin-off of copper networks to Brightspeed for $7.5 billion and the sale of its Latin American business to Stonepeak for $2.7 billion.
One of the interesting things to watch is how much Lumen will be able to invest in new infrastructure in 2024. In 2023, the company invested something in the range of $3 billion. One of the best ways for Lumen to continue to grow revenues and margins is by building more fiber to enterprises or residential customers. Fitch noted that growing margins is the company’s best path to meet its obligations.
Like much of the rest of the economy, the best news for Lumen would be a significant easing of interest rates. ISPs of all sizes are struggling to justify projects at current interest rates. Almost everybody I’m working with is assuming that there will be a future opportunity to refinance debt put into place at current high rates.
Note that the title of this blog is a question. I doubt that anybody outside of the inner circle at Lumen knows if the company is really in trouble or not. It’s clear that the company is financially distressed, but it still has a lot of solid customers and revenues. As has happened with several past iterations of the company, Lumen might squeak through the current troubles and be on solid ground again in a few years. Or we might see a sudden bankruptcy. Your guess is as good as mine.