Lucent Technologies cut to junk status

Jonathan Stempel

NEW YORK: Standard & Poor's on Tuesday cut its debt ratings for Lucent

Technologies Inc. to junk status, expressing worry over Lucent's ability to

improve profits and cash flow in a tough telecommunications sector.

The downgrade, which came after US stock markets closed, triggered some

selling in Lucent bonds, and came two weeks after the money-losing No. 1 US

telecom equipment maker broke off merger talks with France's Alcatel SA. Lucent

said it was not surprised by the downgrade, which it said should not hurt its

drive to cut costs and restructure. S&P had earlier warned it could cut

Lucent's ratings to junk, and Lucent's bonds were already trading like junk

bonds.

Downgrading investment-grade debt to junk ordinarily raises corporate

borrowing costs and forces some mutual funds to sell because their rules

prohibit them from owning junk bonds. Lucent has said its most recent downgrade,

in February, had left it effectively unable to sell commercial paper.

S&P cut Lucent's corporate credit and senior unsecured debt rating one

notch to "BB-plus" from "BBB-minus," and its commercial

paper, or short-term debt, rating to "B" from "A-3." The new

ratings are S&P's highest junk grades. S&P said its rating outlook for

Lucent is negative.

Lucent slashes costs



After being spun off from AT&T Corp. in 1996, Murray Hill, New Jersey-based
Lucent was for awhile a Wall Street golden child. Its shares, however, have

fallen more than 86 percent in the last year as earnings declined. Last October

the company's board fired its chief executive.

Lucent, which lost $3.7 billion in its fiscal second quarter, this year

announced plans to cut or transfer 16,000 jobs, or 15 percent of its workforce.

It also is trying to cut operating costs by $2 billion a year. Current chief

executive Henry Schacht told an Atlanta technology conference last week that

Lucent is speeding up its cost-cutting, and plans to remain independent.

"We are on our own and that's fine," he said. His optimism was not

enough to forestall S&P's downgrade, which many investors expected,

following a steady decline in Lucent's once medium investment-grade credit

ratings beginning last October.

Shares of Lucent closed Tuesday on the New York Stock Exchange at $7.94, down

10 cents. They have fallen 41 per cent this year. A trader said the company's

7.25 per cent notes maturing in July 2006 fell about three cents on the dollar

to 85 cents, with a yield to maturity of about 11.2 per cent.

No profits



S&P said the downgrade "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."

The agency also said the company still has a "subpar" vendor

finance portfolio, and will likely not report an operating profit until the

first half of fiscal 2002. Lucent spokeswoman Michelle Davidson said: "This

action is not surprising. We don't expect it to have a significant impact on our

business. We are executing on all points of our business restructuring program,

and as we have said we are picking up the pace."

"The downgrade was probably expected," said Theresa Fennell, a

high-yield portfolio manager for American Century Investment Management Inc. in

Mountain View, California.

Cash needs



Key to Lucent's future prospects is its ability to sell its fiber business,
which analysts have said may now be worth less than the $5 billion to $6 billion

Lucent once expected to raise.

Lucent needs to raise $2 billion of cash from nonoperating sources by

September 30 to finish the spinoff of its Agere Systems Inc. optical components

unit. "That's a problem right now," said Bill Densmore, an analyst at

credit rating agency Fitch Investors, which rates Lucent's long-and short-term

debt "BBB-minus" and "F3," respectively, its lowest

investment grades. "If they can't do the fiber sale, they have to come up

with a Plan B, and there's concern about whether it could do that."

Lucent in February secured $6.5 billion in credit facilities to help it run

as it restructures. "When you look at the credit facilities we negotiated

in February, the $3 billion in value we extracted from the Agere IPO, our

improved performance in our second fiscal quarter in our top and bottom lines,

and the pending sale of our fiber business, we have the liquidity we need to

continue to execute our turnaround," said Davidson.

The other leading rating agency, Moody's Investors Service, rates Lucent's

long-and short-term debt "Baa3" and "Prime-3," its lowest

investment grades. To see the S&P rating action, please click on .

(C) Reuters Limited 2001.