Lucent Credit Ratings Cut to Near Junk

NEW YORK (Reuters) - Lucent Technologies Inc.'s (LU.N) credit ratings were cut on Monday to a notch above junk status by Moody's Investors Service and Standard & Poor's, after the telecommunications equipment giant posted a $1.02 billion first quarter operating loss. Lucent, meanwhile, said the downgrades left it unable to sell commercial paper, a kind of short-term debt that is a big source of funding for many companies.

Moody's said its downgrades reflected Lucent's "significant operational difficulties." S&P said its downgrades reflect the belief that Lucent will incur "substantial operating losses" in the near- to intermediate-term.

The company, "had lost its way in pursuit of growth," said Bruce Hyman, an S&P director, in a Monday conference call.

Shares of Lucent, which is based in Murray Hill, N.J., closed down 56 cents, or 3.65 percent, at $14.80 on the New York Stock Exchange. Volume topped 16.1 million shares. The shares have fallen 80 percent from their 52-week high of $75.25, set last March 1.

Lucent's 7.25 percent notes maturing in July, 2006, were bid on Monday to yield about 3.75 percentage points more than similar maturity U.S. Treasuries, 0.35 to 0.4 more than on Friday. Their yield to maturity is about 8.6 percent.

MAY TAP CREDIT LINES

Moody's cut Lucent's senior unsecured debt rating two notches to "Baa3" from "Baa1," and its short-term debt rating to "Prime-3" from "Prime-2."

S&P cut its equivalent ratings to "BBB-minus" and "A-3" from "BBB-plus" and "A-2."

The new ratings are the agencies' lowest investment grades. The long- and short-term ratings have fallen four and two notches each in fewer than two months, a steep drop for a big company. The agencies' rating outlooks are negative, meaning conditions are present that may make further cuts possible.

Downgrades ordinarily raise corporate borrowing costs. A downgrade to junk status would force Lucent investors not permitted to own junk to sell.

A spokeswoman for Lucent, Michelle Davidson, said the company cannot tap the $1.6 trillion commercial paper market and will draw on credit lines if it needs short-term cash.

"If the need arises, we will borrow from our existing credit lines," she said.

Lucent has $4 billion of credit lines. It is amending a five-year, $2 billion revolving credit line and negotiating $4.5 billion of 364-day lines of credit. It plans to use these in part to take out another existing $2 billion line.

The expected $6.5 billion of credit lines will "help meet our cash flow needs," Davidson said.

As of Dec. 31, Lucent had $5.03 billion of debt maturing in one year, the company said in a filing with the Securities and Exchange Commission.

RESTRUCTURING

Last month, Lucent said it will take up to $1.6 billion in restructuring charges as it cuts capital spending and 10,000 jobs. On Friday it disclosed it is cooperating with the SEC in an accounting probe.

A big challenge for Lucent will be to increase its revenues, said Michael Weaver, senior director for another credit rating agency, Fitch.

"You have a falloff in demand for products that generated high margins, such as circuit switching systems and software," said Weaver. "The saving grace with any technology company is obsolescence -- the next product can be only 12 to 24 months away, and it will be important for Lucent to hit that cycle."

Moody's said Lucent's restructuring measures are "prudent," but it added "the company will have difficulty" realizing the potential benefits. "Retention of talented personnel throughout the organization will be a major challenge," it said.

Hyman said S&P's cuts are not related to the SEC probe. Competition and a weakening U.S. economy could make it harder for Lucent to hold its new ratings, S&P said.

"Profitability and recovery of operating cash flow" are its big challenges, Hyman said. "I don't think that we can expect this will be a situation of an instantaneous turnaround."

Fitch, meanwhile, rates Lucent's long and short-term debt "A" and "F1," and has them on review for downgrade.

Weaver said Fitch's ratings, roughly four and two notches higher than Moody's and S&P's new ratings, are "not accurate ratings," but said Lucent is in position to right itself.

"The company can turn itself around because it has a huge client base for its installed equipment," he said.

Davidson said Lucent will keep the agencies informed of its progress as it restructures.

J.P. Morgan Chase & Co. (JPM.N) and Salomon Smith Barney, a unit of Citigroup Inc. (C.N), are arranging the $4.5 billion of new credit lines.

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