Markets & Finance

S&P Cuts Lucent Debt Rating Below Investment Grade


On June 12, Standard & Poor's lowered its corporate credit rating on Lucent Technologies Inc. (LU) to double-'B'-plus from triple-'B'-minus and removed it from CreditWatch, where it had been placed on March 28, 2001, with negative implications.

The outlook is negative.

The ratings change, which completes Standard & Poor's current review of the company, reflects significant uncertainties about the company's ability to continue to improve its operating profitability and cash flows to anticipated levels, in light of challenging communications sector market conditions.

Ratings had been placed on CreditWatch in March following a $2 billion shortfall in proceeds from the IPO of its Agere Systems Inc., semiconductor operation, now about 57%-owned by Lucent. The remaining Agere shares are expected to be distributed to Lucent shareholders by Sept. 30, 2001, provided that Lucent also bolsters its liquidity by $2 billion from nonoperating sources by that date. The company's plan to sell its fiber optic cable unit would likely satisfy that requirement.

Lucent has expected to sequentially increase revenues and reduce operating losses quarterly during its fiscal year ending Sept. 30, 2001. Still, telecommunications industry demand levels have deteriorated during the year as economic pressures have expanded. Reflecting a very dynamic situation, the loss for the year is likely to be more than what was expected just a few months ago, and operating performance will take longer than had initially been expected to return to levels consistent with an investment-grade rating.

Despite very difficult conditions, Lucent is addressing the challenges it faces. It completed the first phase of the Agere spin-off under very adverse conditions. In addition, Lucent continues to take steps to reduce operating costs by $2 billion annually and also to reduce working capital requirements by $2 billion by the end of this fiscal year. However, most

of the staff reductions will not occur until the September quarter. The company also remains exposed to a subpar vendor finance portfolio.

In light of difficult market conditions, coupled with uncertain progress in reducing costs, Standard & Poor's believes that Lucent will be challenged to generate sufficient progress to warrant investment-grade ratings. Standard & Poor's feels that Lucent's return to operating profitability will likely be delayed until the first half of its fiscal 2002. While Lucent has ample near-term liquidity, expected to be bolstered by the fiber sale or other transactions, operating cash flows are expected to remain materially negative over the next few quarters.

Ratings on Lucent anticipate that the Agere spin-off will close before Sept. 30, 2001, the end of Lucent's fiscal year, and that net proceeds from any nonoperating sources of liquidity will exceed the $2 billion Agere shortfall. Ratings also anticipate that Lucent will achieve sustained operating profitability by the first half of fiscal 2002. Should the fiber or Agere transactions not proceed as planned, or if material operating losses continue beyond the end of fiscal 2001, ratings would likely be lowered, Standard & Poor's said. From Standard & Poor's CreditWire


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