Lucent Takes Another Hit With Ratings Downgrade

Hapless Lucent (LU) took another blow Tuesday as the leading credit-rating agency, Standard & Poor's, cut Lucent's bonds to junk status.

Citing concerns about cash flow and the phone gearmaker's recovery prospects, S&P dropped Lucent's corporate credit and senior unsecured debt rating by a notch, to double-B-plus from triple-B-minus. The new rating is S&P's highest noninvestment-grade rating.

The junk rating will likely impede Lucent's ability to raise cash through such things as convertible bond offerings. It could lead to a selloff among Lucent bondholders, such as pension funds, that by definition cannot hold junk bonds.

"This is one company that didn't need more negative questions to deal with," says Glenn Reynolds, a debt analyst with CreditSights, a New York-based research firm.

A Lucent spokeswoman says the company doesn't expect the downgrade to affect its business, and that the company is "picking up the pace" of its restructuring program. Lucent insists it has enough cash to fund its operations and execute a widely awaited turnaround.

But there's no question the move comes as a blow, just weeks after efforts to find a merger partner came to a halt. "This gives them less access to the capital markets and less financial flexibility," says Reynolds.

In order to save its ratings, Lucent needed to raise about $2 billion in nonoperating cash by September. The company sought to show creditors that it was making progress on its turnaround and on the sale of its fiber-optic business, which could fund the cash requirement.

It's not clear what triggered the S&P downgrade, but some observers think Tuesday's earnings warning from cell-phone giant Nokia (NOK) sent renewed chills across the telecommunications sector, which has been suffering for months from a spending crunch.

Lucent shares, which fell 1% during regular trading Tuesday, fell 44 cents, or 5%, to $7.50 in after-hours trading on Island.

Moody's, S&P's rival rating service, was unavailable for comment Tuesday. The two agencies often move in tandem on high-profile ratings.

"If you were holding [Lucent bonds] to maturity, you were probably hoping they would have started to turn things around at this point," Reynolds said.

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