Vivendi Debt Rating Cut to Just Above Junk Status

In another symbolic blow to Vivendi Universal Chief Executive Jean-Marie Messier, Moody’s Investors Service said Friday that it had downgraded the long-term debt ratings of the French media giant amid concerns about the company’s debt level and Messier’s growth-by-acquisition strategy.

Moody’s lowered Vivendi’s rating one level to Baa3 with a stable outlook. The classification is Moody’s lowest investment-grade rating--one notch above “junk” status assigned to speculative investments.

“The rating action reflects Moody’s continuing concerns that Vivendi Universal might not be able to reduce debt as quickly and comprehensively as planned,” Moody’s said in a report. Though Moody’s acknowledged Vivendi’s “unequivocal commitment to debt reduction and solid operating results,” the credit-rating company also cited “uncertainties about the future strategic evolution of the company.”

Vivendi said Moody’s did not “fully take into consideration the currently poor market conditions” and the company’s debt-reduction program. Vivendi said the rating reduction doesn’t affect Vivendi’s cash position or trigger any advance repayments of bank credit lines. The company also said it was confident it would meet its operating targets for 2002.

Still, Friday’s action comes at an especially bad time for Messier, who has faced a barrage of setbacks in recent weeks, including a management crisis in the company’s European pay-television operation, alleged tampering of vote counts in the company’s annual shareholders meeting and disclosures about off-balance-sheet liabilities that could cost the company an additional $1.3 billion.

Messier also has been under heavy pressure from investors to reverse the steady slide in Vivendi’s stock price, which has fallen amid questions about the company’s strategy, communications with investors and debt load.

A string of deals in the last four years, including acquisitions of Seagram Co.’s Universal Studios and U.S. education publisher Houghton Mifflin, has left Vivendi’s media business with about $15billion in debt. The company’s pending acquisition of the film and TV business of USA Networks will add $2.4 billion to the debt load.

The immediate effect of the downgrade is that Vivendi’s short-term borrowing costs probably will go up, several analysts said.

The greater concern, however, is the long-term repercussions of the downgrade and the signal it sends to investors, who reacted coolly to Friday’s developments, sending Vivendi’s shares down $1.60, or 5.2%, to $29.07 on the New York Stock Exchange. The stock, which hit a session low of $28.30 on Friday, has tumbled more than 46% this year.

“Certainly, it’s not good news,” said Mark Harrington, an analyst with J.P. Morgan Chase & Co. “Moody’s reacted to the nervousness in the market.”

If Moody’s reduces the rating further, it could create serious problems for the company, analysts say.

Some institutional investors could bail out, and Vivendi could be forced to accelerate its loan repayments according to covenants with lenders.

“It’s not what they need right now,” said Michael Nathanson, an analyst with Sanford C. Bernstein & Co. “It’s just another stick in the eye.... It puts them a little closer to being in really bad shape.”

Reductions in debt ratings can have significant consequences for corporations. Enron Corp.’s demise, for example, was accelerated after credit agencies downgraded the energy giant’s bonds to junk status.

However, unlike Enron, Vivendi has plenty of assets it could sell off to meet debt obligations in the event of a further rate cut, analysts say. Vivendi has, in fact, been taking such steps.

The company last month unloaded its professional and health publishing unit for about $1 billion, though the purchase price was nearly half what Messier told investors it would sell for a year ago. At the company’s annual shareholders meeting, Messier said reducing the company’s debt was a top priority this year.

Vivendi said this week that payment obligations from put options could force it to buy back some of its own shares at levels far above current prices, costing the company as much as $1.1 billion. And because of the company’s depressed stock price, Vivendi also may have to pay an additional $250million to record impresario Herb Alpert and his business partner, Jerry Moss, founders of independent music publisher Rondor Music International Inc.

Moody’s cited the complex financial arrangements in its report and also questioned whether Vivendi would be able to meet its cash flow targets this year, given the slowdown in the music business and challenges from piracy and struggles in its Internet portal, Vizzavi.

“The company’s ambitious Vizzavi portal project, initially a cornerstone of the new Vivendi Universal strategy, has failed to live up to expectations,” Moody’s said.