Lumen Debt Restructuring Draws Ire From Left-Behind Creditors - Yahoo Finance

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(Bloomberg) -- A proposed deal to restructure one of the largest piles of US distressed debt is drawing ire from creditors who have been left out of the transaction.

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Lumen Technologies Inc., a struggling telecommunications firm with nearly $20 billion of debt, cut the deal with a group of investment firms including Silver Point Capital, Pacific Investment Management Co., Diameter Capital Partners and Blackrock Inc., according to people with knowledge of the matter who asked not to be identified because talks are private. Creditors who weren’t part of the negotiations aren’t sure if they will be allowed to participate in the restructuring, or what will happen to their debt if they can’t.

Lumen’s proposal calls for creditors to swap certain securities tied to its Level 3 unit into longer-dated, higher-coupon maturities. The deal would also hand Lumen $1.2 billion in fresh financing provided by select existing creditors. Holders of around $7 billion of the company’s debt have signed on.

The plan is the latest example of controversial distressed debt financings that pit creditors against each other and frequently end up in court. Such transactions have grown more common in recent years as companies seek to take advantage of loose credit agreements and creditors battle over a relatively small pile of troubled company debt.

Lumen’s new deal combines several contentious debt moves, the people said, including a new loan that effectively moves other creditors back in line for repayment. Lumen is also contemplating potential asset transfers, as well as a “double-dip” transaction that grants certain creditors multiple claims against the same entity.

Creditors who participated in the deal were under pressure to come up with a restructuring agreement before Lumen reported quarterly results on Tuesday, some of the people said.

Representatives for Lumen and the funds declined to comment.

Bonds Fall

In the aftermath of the announcement, fearful creditors rushed to sell Level 3 debt. Several bank trading desks began separating bonds that were part of the new deal and notes that would be left behind in quotes sent to investors, the people said, with securities that were part of the deal maintaining much higher prices.

Some left-behind investors are now seeking to band together and come up with ways to block the transaction, the people said. In addition to the aggressive debt moves, some creditors are also questioning around $260 million worth of fees in cash and bonds the funds providing Lumen with new money are set to receive, the people said.

A group of Lumen secured debt holders advised by Evercore Inc. and Gibson Dunn & Crutcher held a call Wednesday to review the plan and their options, and some Level 3 debt holders have joined the group in hopes of challenging the proposal, the people said.

Representatives for Evercore and Gibson Dunn declined to comment.

Complex Restructuring

Lumen’s deal is unusually complicated due to the size of its balance sheet and its corporate history. The company formerly known as CenturyLink has grown over the years through a series of acquisitions, leaving it with several different entities that issue debt. Multiple groups of Lumen debt holders hired advisers to negotiate with the company as it sank into financial distress, and Lumen focused its talks with a group of creditors holding Level 3 debt.

Some of the left-behind creditors are concerned about the power the participating Level 3 creditors have to dictate the path of the restructuring. That group, which agreed to the deal by Oct. 31 and holds the bulk of Level 3’s debt, can essentially determine which other creditors can be involved in the deal, and how restructuring terms may be revised, the people said.

According to the current agreement, certain Lumen term loan holders can receive cash and the ability to swap their debt for a new higher-ranking term loan, at the discretion of the “majority consenting parties.” The company plans to transfer 49% of assets of its business Qwest Corp. to subsidiaries that will guarantee the debt to improve the collateral tied to the loan.

While creditors fume, Lumen needs to round up more support to clinch the deal, and also must extend a term loan and revolving credit line.

--With assistance from Eliza Ronalds-Hannon and Michael Tobin.