2 More Firms Drop Lucent Debt Rating to Junk

Struggling Lucent Technologies Inc. suffered another costly indignity on Tuesday as both Moody’s Investors Service and Fitch relegated the telephone equipment firm’s long-term debt to junk status.

The ratings cuts follow a similar step by Standard & Poor’s two weeks ago and affects $3.8 billion of Lucent’s debt and further limits the company’s ability to raise money at reasonable prices through the bond market.

Lucent is suffering from a deepening slump in the communications equipment business, which has slowed to a crawl as smaller telecommunications companies go out of business and larger phone companies cut back their spending.

The sharp downturn, which triggered Lucent’s bad-news spiral, also is sparking big losses, layoffs and reduced sales at Nortel Networks and other equipment firms. Nortel this month warned of a $19.2 billion second-quarter loss.

After Lucent announced big losses and a series of reduced revenue forecasts, the company embarked on a plan to cut thousands of jobs, slash $2 billion of annual operating costs and sell off its fiber-optics unit and possibly several manufacturing plants.

Glenn Reynolds, analyst at New York-based research firm CreditSights Inc., said Lucent’s top priority should be to proceed with the asset sales. “They need every dollar they can get,” he said.

On Tuesday, Moody’s lowered its rating on Lucent’s senior long-term debt to Ba1, down from Baa3, and said the debt would be reviewed for possible further downgrades. The agency also lowered the rating for Lucent’s commercial debt to Not Prime, down from Prime.

Fitch also lowered Lucent debt to junk status. Fitch cut its long-term debt rating for Lucent two notches to BB, its second-highest junk grade, from BBB-, and its short-term rating to B from F3.

The ratings cuts, together with the earlier move by Standard & Poor’s, make Lucent debt offerings off limits to a wide range of potential investors, including many mutual funds and pension plans that only buy investment-grade debt offerings. This also means the Murray Hill, N.J.-based company will have to pay out higher returns to lure future debt investors.

Lucent spokeswoman Michelle Davidson said Tuesday’s rating cuts “won’t have a significant impact on our business. We are making continuing progress with our business restructuring program, and we are accelerating our plans. Over time, we expect our ratings will improve.”

Lucent’s shares rose 15 cents to $6 Tuesday on the New York Stock Exchange. The company’s stock, once among the tech world’s highfliers, has fallen 90% in the last year.

Moody’s said it expects a “more protracted downturn” in the market for Lucent’s communications switches and other products. The ratings agency also expressed concern about Lucent’s ability to quickly raise substantial amounts of cash through the sale of its fiber unit and other assets.

Lucent must raise $2 billion by Sept. 30 to satisfy bank agreements and complete the spinoff of its Agere Systems Inc. chip-making unit. In addition, Lucent needs $5 billion from asset sales or private equity sales before banks will release their security interest in Agere shares, Moody’s added.

Lucent had hoped to raise most--if not all--of the needed cash through the sale of its fiber-optic cable business. But the sale was put on hold while Lucent pursued an unsuccessful merger deal with French rival Alcatel, and now analysts believe the fiber unit will fetch as little as $3 billion.

“The real concern is whether Lucent can raise the cash to get through this short-term liquidity issue,” said Steve Kamman, an analyst at CIBC World Markets. “It’s looking pretty hairy.”

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Times wire services were used in compiling this report.