A debt exchange completed by Level 3 Communications this week has given the company more runway and Wall Street more optimism in it.

The debt exchange, completed on Wednesday, left Level 3 with $692 million in debt that matures in 2010 and another $600 million due in 2008.

The move, combined with a decrease in the company's cash burn rate, improved Level 3's standing among Wall Street analysts, including Merrill Lynch's David Janazzo, who upgraded his recommendation for the company's stock from "sell" to "neutral" yesterday.

"The business outlook for wholesale transport, IP services and consumer voice-over-IP remains opaque," Janazzo wrote in a research note Thursday. "But Level 3 now has more time."

Janazzo expects Level 3 to reach cash flow break-even in 2009, a year before $2.3 billion of its debt matures.

The company's key challenge will continue to be growing its wholesale transport, IP and consumer VoIP businesses faster than that from its managed modem business declines. To do that, Janazzo wrote, Level 3 will need to grow revenue in those three areas by 26% to 32% annually. In 2005, their revenue grew nearly 11%, he added, but should accelerate this year.

If needed, Level 3 could raise additional debt, he said, provided the debt markets hold up. And it still owns non-core assets that it could liquidate, such as its coal mining and software reseller businesses. Level 3 might also acquire another long-haul carrier, such as Broadwing or Global Crossing. If the company should incur additional debt to fund such an acquisition, it might increase investor anxiety. But for the near term, Janazzo wrote, "The likelihood of financial distress has been reduced."