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Wall Street credit rating houses cut their ratings on Lucent Technologies' $8.1 billion in short- and long-term debt, adding yet another problem to the operational woes at the Murray Hill, N.J.-based telecom equipment maker.
The revisions by both Moody's Investors Service and Standard & Poor's Corp. raise Lucent's cost of borrowing money. Even though the company retains a so-called "investment grade" credit rating--one notch above junk bond status--institutional investors that can't own junk bonds aren't buying Lucent bonds.
The rating cuts also mean the unit Lucent set up to get its vendor finance program off its books can't buy any more assets from the parent company until its ratings come up, the Wall Street Journal reports.
The rating changes come as Lucent continues struggling toward a restructuring that eventually will break the company into several new entities. On top of missteps in key markets such as optical networking, Lucent also has suffered from lower equipment and software sales due to slowing telecom markets. The company reported it lost $1.7 billion during the quarter ended Dec. 31, as revenue fell 26 percent while industrywide revenue growth rates were in the 20 percent range.
Moody's cut its rating on Lucent's unsecured long-term debt to "Baa3" from "Baa1" and lowered the rating for commercial paper to "prime3 from prime1." It also listed the company for possible further downgrades.
"We can see a path, a series of 'ifs,' where the debt load is supportable," although Moody's isn't ready to say the company's cost-cutting program will stabilize the situation, says Bob Konefal, managing director at the bond rating company. "That's why the negative outlook. We're worried."
S&P lowered its rating to "BBB-" from "BBB+." S&P dropped the commercial paper rating to "A3" from "A2." It also may downgrade Lucent further.
In addition to the revenue slowdown in the December quarter, Lucent had to revise its September quarterly financial report. It deleted $227 million in revenue because of accounting improprieties, and took back another $452 million in revenue for equipment shipped to distribution partners, but never actually sold to customers.
The company in December told the Securities and Exchange Commission about the accounting problems that led to the improper booking of the sales and fired one employee. The SEC reportedly is reviewing those procedures, although the agency won't comment on any investigation.
On the plus side, Lucent has plenty of cash and its liquidity should improve with the estimated initial public stock offering of Agere, its former Microelectronics unit, expected to generate $7.4 billion when completed, as early as this month. As part of the transaction, Agere will assume $2.5 billion of Lucent's debt.
The company also is in the process of negotiating $6.5 billion in credit facilities, $2.5 billion of which ultimately will be assigned to Agere. J.P. Morgan, Salomon Smith Barney, an affiliate of J.P. Morgan Chase Co. and Citicorp North America Inc. are participating in the credit arrangement. Agere's IPO is being handled by Morgan Stanley Dean Witter & Co.
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