S&P; May Cut Lucent Debt Rating to Junk
The financial crisis for Lucent Technologies Inc. deepened Wednesday when Standard & Poor’s Corp. placed Lucent’s debt ratings under review for a possible cut to junk status, a once-unthinkable event for the world’s largest maker of telecommunications equipment.
The bond-rating agency said it took the action after Tuesday’s disappointing initial public stock offering by Agere Systems Inc., a maker of optical electronics that Lucent spun off to help raise cash and pay down Lucent’s enormous debt. The IPO raised only about $3.6 billion, far less than the original goal of $6.5 billion.
Should S&P; go ahead and lower Lucent’s debt to speculative grade--or junk, as Wall Street calls it--it would be much more than just an embarrassment for the Murray Hill, N.J.-based company. Not only would it force Lucent to pay higher interest rates to borrow again, it also would force some institutional investors to dump Lucent’s debt securities because those money managers are prohibited from owning junk bonds.
Although Lucent still has $4 billion in available credit lines, and might sell its fiber-optic cable business to raise more cash, “the structure, timing and proceeds of such a transaction are uncertain,” S&P; said.
Michelle Davidson, a spokeswoman for Lucent, said: “We’re confident that Lucent has the financial resources in place to successfully execute its turnaround strategy.”
But “they have a very tough job ahead of them,” said Walter Casey, an analyst with Banc One Investment Advisors. “I don’t think they’re out of the woods yet.”
Indeed, S&P;’s announcement punctuated the rapid decline of Lucent, which itself was spun off from AT&T; Corp. in 1995 and, for the next four years, was a standout performer and a blue-chip stock on Wall Street as its shares soared tenfold.
But in the last year, Lucent time and again posted disappointing quarterly profit and sales. It reported a $395-million loss on revenue of $5.8 billion in its fiscal first quarter ended Dec. 31. The company is struggling with a slowdown in demand for its conventional telephone switches, as well as problems in demand from the telecom industry for newer optical-based equipment.
On Wednesday, Lucent’s leading rival, Nortel Networks Corp., an Agere customer, said it will lose more money this quarter than expected and that Nortel can’t forecast how it will perform for the year.
Lucent’s stock, one of the most widely held in the world, steadily plunged in 2000--effectively eliminating the company’s ability to raise more cash with stock sales to ease its debt load. As of Dec. 31, Lucent had long-term debt of $3 billion, plus $12 billion of debt coming due in just the next 12 months.
All of this led to Lucent firing its former chief executive, Richard McGinn, last October. Three months later, Lucent unveiled a huge restructuring to slash costs, including the elimination of 16,000 jobs.
And to top it off, the Securities and Exchange Commission early this year reportedly began probing possible fraudulent accounting practices at Lucent. Lucent said it was cooperating with the agency.
The ratings under review by S&P; include Lucent’s senior unsecured debt and its commercial paper, a type of short-term corporate debt. A higher price for the Agere stock IPO would have given Lucent more cash to offset its operating losses and debt payments. The extent of the shortfall won’t be known until Lucent reports its next quarterly results, said S&P; analyst Bruce Hyman.
Meantime, prices for Lucent’s bonds and stock continue to tumble. Its 6.45% unsecured debentures maturing in 2029 already were quoted at only 69.44 cents per $1 of face value before S&P;’s announcement.
Lucent’s stock fell another $1.43 on Wednesday to $10.27 a share on the New York Stock Exchange. It’s now plummeted 84% from a year ago. During that span, more than $180 billion of stockholders’ wealth has vanished.
Agere’s stock sale was repeatedly delayed and hobbled not only by earnings warnings from Lucent, but also by the stock market’s overall slump. Agere finally sold 600 million shares at $6 each, far below the initial $15 to $20 a share that Lucent had initially sought. Agere edged up 2 cents to $6.02 in its first day of NYSE trading Wednesday.
Lucent had intended to cut its debt by about $2.5 billion under a debt-for-equity swap with the lead underwriter of Agere’s IPO, Morgan Stanley Dean Witter & Co. Now, Lucent has an agreement with the investment bank under which Morgan Stanley may opt to retire about $500 million in Lucent debt in exchange for 90 million additional Agere shares.
“This compares to earlier expectations that Lucent would receive $2.5 billion in value from the IPO” from the debt swap, S&P; said.
The phone-equipment maker needs to make up that shortfall, S&P; said, to avoid having its ratings cut for the fourth time in as many months.
Lucent said it may sell the business that makes fiber and cable used in telecommunications networks. A sale, which analysts said could fetch $5 billion, faces a more skeptical market, said Patrick Comack, an analyst at Guzman & Co. “The market is really against them,” he said.
S&P; said it plans to meet Lucent’s management “to assess the company’s liquidity, plans for the fiber unit and business prospects.”
Another ratings firm, Moody’s Investors Service, cut Lucent’s senior unsecured debt ratings to one rung above junk status Feb. 12, and said the outlook was negative.
Moody’s has “no current plans” to put its Lucent ratings on watch, said Bob Ray, a senior vice president at the firm.
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Discounted Bonds
Lucent Technologies’ bonds have already fallen sharply in value, reflecting investors’ concerns about the company’s credit-worthiness. Market prices for Lucent bonds paying 6.45% interest and maturing in 2029:
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Lucent 6.45% debentures, market price per $100 face value, month-end data and latest
Wednesday: $69.44
Source: Bloomberg News
