Level 3: Is That Warren Buffett with His Billfold Out?

With financial-market volumes in the doldrums, traders have had more time than usual to gossip lately. Those who buy and sell distressed debt are abuzz with a rumor that since May, Berkshire Hathaway (BRK.A ) Chief Executive Warren E. Buffett has bought a ton of bonds in struggling long-distance fiber operator Level 3 Communications Inc. (LVLT ) of Broomfield, Colo.

Why are the debt traders so sure they know something? Simple. They say that most of the buying came through Buffett's own trader, who is located in Berkshire Hathaway's Omaha (Neb.) headquarters. Meanwhile, sources close to the company say one bondholder has bought more than $600 million worth of Level 3 bonds recently. Bingo! (Neither Buffet nor Level 3 execs will comment.)

On the surface, there's not a lot for investors to go for. The stock has plunged almost 90% from its high this year, while bond buyers have had a real roller-coaster ride of late. On June 18, when the company announced it was cutting a quarter of its workforce and shaving $2 billion off costs, the bonds plummeted from 51 cents on the dollar to 35 cents. They subsequently rebounded to 42 cents.

Whether the bonds apparently bought by Buffett's trader are destined for Berkshire Hathaway Inc.'s portfolio, a subsidiary company, or even a third party is unclear. Buffett has long shunned the tech sector. And Level 3 is not exactly an Old Economy Buffett-style company with solid cash flows, such as Coca-Cola Co. (KO ) or Geico Corp. While Level 3 does have $4 billion of cash on its books, some industry observers wonder whether the company will burn through it all before its cash flow turns positive in 2005.

BOARD BUDDIES. Buffett, however, is no stranger to Level 3. Its Chairman, Walter Scott Jr., sits on the board of Berkshire Hathaway. And Scott, the former chairman and CEO of the privately held construction company Peter Kiewit Sons' Inc., goes to work every day in the same office building as Buffett in the Kiewit Plaza in Omaha.

Indeed, some traders speculate that Scott may be buying Level 3 debt through Buffett's trader. He also happens to be the company's largest shareholder, owning 32 million shares, or 9% of the shares outstanding. Buying debt at 42 cents on the dollar could be a cheap way to retire some of Level 3's nearly $8 billion worth of debt--especially since a quarter of Level 3's cash is now needed to pay off interest, says Aryeh Bourkoff, a telecom analyst at UBS Warburg.

It wouldn't be the first time that Scott, who declined to comment, has tried to help pay down the high-yield debt of a company with which he is affiliated. On May 29, he announced he would buy $50 million worth of common stock and warrants of RCN Corp. (RCNC ), a bundled cable-service provider; Level 3 owns 30% of the stock. The same day, RCN said it would use the proceeds to repurchase its debt.

Because of the intense interest in Buffett's investment plays, the rumors about who is buying Level 3 bonds--and why--will persist until the mystery buyer fesses up. Or until some Wall Street gumshoe discovers who done it.

By Debra Sparks in New York

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