Lucent debt near junk

Amid its struggle to return to profitability, Lucent Technologies suffered a blow yesterday, being downgraded by the country’s two largest credit rating services.

Both Moody’s Investor Service and Standard & Poor’s moved Lucent’s debt rating to just one notch above junk level.

According to Moody’s, its downgrades, “reflect the significant operational difficulties at the company,” shown in the $1.7 billion loss the company posted in the most recent quarter. Among these difficulties, Moody’s lists market-share loss in virtually all segments except optical fiber and a corporate culture heavily focused on increased revenues, leading to a restatement of earnings for the fourth quarter of 2000.

To address many of these problems, the company announced a restructuring program in January designed to streamline operations and reduce costs by $2 billion a year, said a Lucent spokeswoman.

“We’re undergoing a sweeping and bold seven-point restructuring program to turn the business around,” she said. “We’ll continue to share information with the rating agencies to ensure that they understand our company’s program and we’ll keep them informed of our progress.”

Although it approves of the plan, Moody’s expects the company will have difficulty realizing all of the potential benefits.

Also figuring into Lucent’s new rating was the company’s $8.1 billion debt at the end of the first quarter and the partial mitigation of that debt by the sale of its power business to Tyco and the proposed spin-off of Agere. These cash resources were significant in Lucent retaining its investment grade rating, said Moody’s.

Though it retains this investment-grade status, Moody’s said the rating outlook for Lucent is negative.

“Lucent has very limited flexibility in the investment-grade category to absorb any delays in the asset sales or further deterioration in expected operating performance. Moody’s expects a much greater degree of rating volatility in the Lucent rating than is typical. If the company is not able to improve its market position and operating performance, or if financing requirements expand rapidly, a further rating downgrade is possible in the near term.”

According to Mario DeRose, fixed-income strategist with Edward Jones, the downgrade to just above junk will prevent the company from selling commercial paper, a form of short-term debt used to fund the day-to-day operations of a company. Lucent, however might not need to assume such debt if it is able to secure a $4.5 billion, 364-day credit facility from J.P. Morgan and Salomon Smith Barney.

More pressing for Lucent is ensuring that its bond rating isn’t downgraded to junk status, DeRose said. If this occurs, many fund managers will be required to sell Lucent bonds, driving down their market price, he said.

“They certainly have to take some action to prevent [being downgraded to junk status],” he said. “I don’t think Lucent can sit by and hope the economy rebounds quickly. They might have to sell some assets or take some action to shore up balance sheets to prevent it from happening.”