Level 3 Communications (NASDAQ:LVLT) may have turned a corner. Or it may not have -- yet.

The company's third quarter had some bright spots, including $40 million in free cash flow -- its first positive quarter since it began building its network. But overall demand remains weak and the outlook bleak following the lowered guidance the company gave on September 22.

Even so, some clever financial engineering puts Level 3 in a stronger position.

Last month, the company raised $500 million in debt to help pay down about $1 billion in restrictive bank debt. Moreover, the company has engineered a number of convertible bond offerings and debt-for-equity swaps aimed at reducing debt and associated interest payments.

In July 2002, Level 3 offered $500 million in convertible bonds to Southeastern Asset Management, Legg Mason (NYSE:LM), and Berkshire Hathaway (NYSE:BRK.A). A more recent move, partially involving a 22 million to 30 million share swap, will reduce interest expense next year by $39 million at the cost of around 3% to 5% of the total company (it's harder to tell these days).

True, as a result of such measures, shareholders have seen and may well continue to see their stakes diluted, but look at it this way: In early 2001, the company had $8 billion in debt and was restricted by financial covenants. Today -- without any pickup in business -- Level 3 has just over $5.3 billion in total debt, no bank debt, and no significant principal payments until 2008.

Clearly, until business picks up, the elimination of restrictive bank debt gives Level 3 the flexibility to make more Genuity-like deals in the future. In addition, the reduction of debt improves cash flow and helps ensure survival until Level 3 does, in fact, turn the corner.

Jeff Hwang owns shares of Level 3 Communications and Berkshire Hathaway. He can be reached at JHwang@fool.com.