Lucent Trims Debt but Loans to Telcos Have Some Wincing

Lucent (LU Quote - Cramer on LU - Stock Picks) may rue the day it chose to play banker to its customers.

Lucent said Monday that in selling additional shares in the Agere IPO, it managed to slash $519 million from its debt burden. While that's a far cry from the $2.5 billion Morgan Stanley Dean Witter was originally planning to convert to cash in the Agere deal, the debt paydown offers a rare entry in Lucent's win column, as the telecom equipment maker attempts to pull itself out of a year's worth of astonishing slipups and bellyflops.

But, as luck would have it, investors have chosen to focus instead on the fallout from Lucent's vendor financing activities, in which the company lent money to now-struggling telecoms in exchange for commitments to buy Lucent gear. With Lucent itself so strapped for cash that it pushed the Agere deal out the door at a fraction of its expected price, investors are wondering how Lucent will pay when borrowers return to ask for more.

"In this environment -- as H.L. Mencken would say -- when you smell flowers, you look around for a coffin," says Glenn Reynolds, debt analyst with CreditSights, an independent New York credit research firm.

The Coffin

The coffin, in this case, may just be the industry's growing list of faltering telcos. In their struggles to stay afloat, these once-flush upstarts may be calling in their last remaining loans from the likes of Lucent, Cisco (CSCO Quote - Cramer on CSCO - Stock Picks) and Nortel (NT Quote - Cramer on NT - Stock Picks).

Among the immediate concerns for Lucent investors is the damage Winstar (WCII Quote - Cramer on WCII - Stock Picks) may cause as it claws for the remaining $400 million to $500 million of the $2 billion that Lucent committed to the upstart phone and data service provider. Winstar said in a filing with the Securities and Exchange Commission Monday that it was engaged in "material discussions" over an undisclosed transaction and will have to delay its annual report as long as two weeks. When that report appears, it should reveal whether the company tapped more cash from Lucent.

If Winstar does draw down more cash from Lucent, it's not clear how Lucent will pay. Some observers, including Reynolds, say Lucent may have to go back to its creditors just to pay its borrowers. A Lucent spokeswoman, citing a pre-earnings quiet period, declines to comment.

Lucent shares were down $1.10, or 11%, to $8.87 in midday trading Monday. An already battered Winstar was down nearly $1, or 45%, to $1.19 on concerns over its ongoing status.

Cisco and Nortel didn't leave the banking to the bankers either.

Cisco, which committed $500 million to Winstar, is also smelling the bouquet of failures. Rhythms NetConnections (RTHM Quote - Cramer on RTHM - Stock Picks) said Monday that it has hired Lazard Freres to explore its options. Cisco has committed $125 million to Rhythms, of which Rhythms has taken $75 million, leaving Cisco on the hook for money borrowed and potentially for more financing.

And Friday, Advanced Radio Telecom filed for Chapter 11. This wireless data upstart got a $175 financing commitment from Cisco and at last check had drawn down $7.8 million.

Nortel, with nearly 50 vendor financing deals in place, including a $500 million promise to mega-network builder Aerie, a $525 million commitment to Leap Wireless (LWIN Quote - Cramer on LWIN - Stock Picks) and $38 million to struggling data service Savvis (SVVS Quote - Cramer on SVVS - Stock Picks), is far from immune to these pressures.

Triple-Whammy

But oh, what a terrific bind Lucent finds itself in. Critics say in its go-go days, Lucent rarely saw a phone or Internet business plan it wouldn't love to finance in exchange for equipment sales. At one point, vendor-financing commitments topped $7 billion, though due to the often secretive nature of these deals, the totals, conditions and even borrowers' names are often shrouded in mystery. Meanwhile, Lucent's credit status is looking tenuous, its 30-year bonds trading at around 60 cents on the dollar.

It's been called the triple-whammy. Lucent committed money to weak companies that can't pay back their loans, can't buy any more equipment and are now calling for the rest of their loans. All this is coming together at a time when Lucent can't get a break on Wall Street.

"When Lucent's credit was put on watch, the company was held hostage by the banks, which in turn caused a crisis of confidence among investors and creditors," says Reynolds.

Now, even as Lucent begins to turn around its operations, says Reynolds, "they can only achieve so much when they have to tap their credit lines to fund their vendor finance commitments."