Lumen Technologies' $1B Notes Offering: Navigating Credit Risks in a Tariff-Turbulent Landscape

The high-yield market is in turmoil. Tariffs, now at their highest level in nearly a century, have pushed spreads to +439 basis points, with yields-to-worst (YTW) surging past 8%. Amid this volatility, Lumen Technologies' $1 billion First Lien Notes due 2033 offer a rare opportunity to assess creditworthiness in a stress-tested environment. This analysis evaluates Lumen's leverage and liquidity, contrasts its resilience with peers like CBL & Associates and Staples, and identifies entry points in its debt stack—while tempering optimism with caution on broader high-yield risks.

The Lumen Playbook: Refinancing Debt Amid Tariff Pressures

Lumen's $1 billion offering is a strategic maneuver to refinance $924.5 million of its 10.5% Senior Secured Notes due 2030, extending maturity by three years and likely reducing interest costs. The First Lien Notes, secured by its core fiber assets, leverage the company's $929 million adjusted EBITDA (excluding special items) and $1.9 billion in cash to underpin creditworthiness.

Crucially, Lumen's leverage metrics are improving. Net leverage, defined as net debt to LTM Adjusted EBITDA, has fallen to 4.2x and is targeted to drop to 3.3x by 2027. This is underpinned by a projected Free Cash Flow (FCF) rise to $300–500 million by 2027, driven by growth in high-margin services like Network-as-a-Service (NaaS) and AI-driven cloud infrastructure.

Tariff Exposure and Mitigation:
Lumen's reliance on imported fiber-optic components, particularly from China, poses risks. Tariffs could inflate capital expenditures by 10–15%, complicating its $4.1–4.3 billion 2025 CapEx plan. However, two factors mitigate this:
1. Asset Sales: The $5.75 billion sale of its Mass Markets fiber to AT&T will reduce debt and free capital for strategic growth.
2. Hard Asset Backing: Its First Lien Notes are secured by Quantum Fiber assets, which now serve 8–10 million locations, providing tangible collateral.

Peer Comparison: CBL & Staples Under Tariff Strain

While Lumen navigates these challenges, its peers face steeper hurdles:

CBL & Associates (CBL): Overleveraged but Secured Debt Offers Yield

CBL's 1L Term Loan (due 2026) trades at 88.50 (13.6% YTW), offering asymmetric upside. However, its overall leverage remains problematic:
- Gross/Net Leverage: 7.1x/6.4x, with $2.7 billion in total debt.
- Asset Sales: The sale of its Imperial Valley Mall reduced debt but underscores reliance on real estate—a sector vulnerable to rising interest rates and economic slowdowns.

Staples (SPLS): Liquidity Strengths, Tariff Weaknesses

Staples' 10.75% 2029 notes, trading near 85, benefit from strong liquidity ($284M cash) and no maturities until 2029. However, tariff pressures on imported goods have dented bond prices. Its capital structure remains stable, but its reliance on low-margin retail exposes it to macro risks.

Entry Points: Lumen's Debt Stack and Cautionary Notes

Investors should focus on secured notes with hard asset backing or shorter maturities, where Lumen excels:
1. First Lien Notes 2033: The $1B offering, secured by fiber assets, offers a 13.6% YTW—similar to CBL's 1L TL but with stronger FCF visibility.
2. Near-Term Maturities: Lumen has no debt maturities until 2027, reducing refinancing risk.

Caution Flags:
- Sector Liquidity: The high-yield market's YTW above 8% reflects systemic risks. Staples' rebound from 79.50 to 85 post-tariff volatility shows how quickly sentiment can shift.
- Tariff Uncertainty: A China-U.S. trade deal could alleviate pressure, but the path to resolution is unclear.

Investment Thesis: A Calculated Gamble on Lumen's Hard Assets

Lumen's First Lien Notes present a compelling opportunity for credit investors:
- Upside: Quantum Fiber expansion and NaaS growth could lift FCF to $500M by 2027, easing leverage concerns.
- Downside: Tariff escalation or a failed AT&T deal could pressure cash reserves.

Recommendation:
- Buy the 2033 First Lien Notes at current levels, targeting a 12–14% YTW.
- Avoid unsecured debt; focus on secured notes with tangible collateral.
- Monitor CBL's 1L TL as a high-yield alternative but avoid its overall debt given its retail exposure.

Conclusion: A Stress Test for High-Yield Markets

Lumen's refinancing highlights a broader truth: in a tariff-driven market, hard assets and cash discipline are king. While Lumen's secured notes offer asymmetric returns, investors must remain vigilant. The high-yield sector's 8% YTW is a warning—opportunities exist, but the path is littered with pitfalls. For now, Lumen's fiber network is a rare island of stability in a turbulent sea.

Final Call: Lumen's secured debt is a buy, but tread carefully in broader high-yield waters.