At the same time, Standard & Poor's assigned its BB- rating to Corning's proposed $500 million convertible preferred stock issue. The outlook is negative.
Corning's downgrade to a speculative-grade rating reflects a somewhat weaker business position due to depressed conditions and poor prospects for recovery in the company's core fiber segment, says S&P analyst Robert Schulz. In addition, continued uncertainty persists about the timing of a return to profitability, despite an already low-cost position and significant ongoing cost reductions, he says.
The rating on the proposed preferred stock applies to the company's obligation to service the preferred stock and its obligation to issue common shares upon conversion. The rating does not apply to the safety of principal. The preferred stock's value depends upon the market value of the company's common shares and is not addressed by the credit rating.
Corning's announcement that it will issue about $500 million in mandatory convertible preferred stock (mandatory conversion into Corning common stock in August 2005) augments an adequate liquidity position. At June 30, Corning had $1.3 billion in cash and short-term investments, most of which were domestically held and available at June 30 and an undrawn $2.0 billion revolving credit facility with 18 banks that expires August 5, 2005. The bank facility is undrawn, has no material adverse change clause past signing, and one financial covenant (maximum 60% total debt to total capital). The proposed preferred stock issue is considered capital under the bank facility. Corning has no liquidity acceleration provisions due to "ratings triggers".
The ratings on Corning reflect sharply deteriorated conditions in many of the company's major markets, particularly in telecommunications, with no assured timing as to recovery, offset by adequate near-term liquidity.
Corning occupies strong positions in telecommunications and advanced materials businesses, based upon technology and manufacturing efficiencies. In the telecommunications industry, demand has dropped precipitously since early 2001, and customers are expected to restrain capital spending until a recovery is assured. This recovery seems unlikely to occur in 2002, and the outlook for 2003 remains weak at best, as major telecommunications and cable customers have slashed capital spending.
The company has responded with a series of restructuring and cost-cutting measures. Corning expects to realize annualized savings of about $265 million from both the restructuring and cost-reduction programs by the beginning of 2003. Cost savings in the second half of 2002 should be about $55 million as these programs are implemented. Capital spending should be $500 million in 2002 compared with $1.8 billion in 2001.
Second quarter 2002 sales of $896 million were about flat with the first quarter, and the operating loss (including restructuring charges of $494 million) was $613 million. Optical fiber and cable volumes were flat compared to expectations of an increase, while prices declined 10%-15%. Cash from operations was $23 million in the quarter compared with negative $171 million in the first quarter, primarily due to improved working capital.
Credit protection measures will remain sub-par for the rating in 2002 due to ongoing losses. Liquidity remains an important underpinning of the rating until the company's businesses return to profitability. Significant refinancing risk exists in the potential "put" of more than $2 billion in zero coupon convertible debentures in November 2005 (which can also be satisfied with common stock). An important determinant of the evolution of this risk will be the company's progress towards profitability and resulting satisfactory access to the capital markets.
Outlook: The proposed preferred stock issuance, along with the company's ongoing and near-term actions on cost reductions, focus on operating cash generation, and possible disposal of non-core businesses, supports an adequate near-term liquidity profile. The rating incorporates substantial progress towards profitability in 2003 during the remainder of 2002 through extensive cost reductions. The ratings could be lowered further if prospects for profitability in 2003 diminish, either due to insufficient cost reductions, or weaker-than-expected end markets, or if liquidity is lower than Standard & Poor's expects. From Standard & Poor's RatingsDirect