Nortel's Outlook Looking Sunnier Than Lucent's

There may be some light at the end of Nortel's NT financial tunnel, but rival Lucent LU remains mired in darkness.

Gaping losses, heavy debt loads and bloated cost structures have put Lucent and Nortel investors on liquidity alert. Nortel two weeks ago forecast a startling $19 billion second-quarter loss, including a $1.5 billion operating deficit. Lucent, meanwhile, has seen its debt downgraded to junk status after a string of management shakeups, accounting inquiries and earnings shortfalls. Both companies' shares trade below $10, more than 75% below year-ago levels.

Now, investors are wondering whether these companies will have the financial flexibility to endure the protracted downturn in telecom gear orders. Both companies have taken steps such as slashing jobs and putting assets on the block. But Nortel's outlook, while far from assured, appears far sunnier than Lucent's.

Mind the Gap

"Lucent and Nortel are very different, if only underscored by the fact that Nortel started out with a vastly stronger balance sheet and did not engage in the vendor financing binge on the same order of magnitude that Lucent did in 2000," says Glenn Reynolds, a debt analyst with CreditSights, a New York research firm.

Barring unforeseen calamities, Nortel will need to raise just $200 million in cash to make it to break-even at the end of next year, according to a Lehman Brothers report released Sunday. Using Nortel's own formula, the new scaled-down operation will turn profitable when quarterly revenue hits $5 billion. Lehman's Tim Luke estimates that Nortel has $1 billion in cash and $2.2 billion in credit. Between now and the end of next year, Luke estimates Nortel will use $2.9 billion on operations and charges. With $500 million untouchable due to a minimum balance requirement, Nortel will have to find $200 million to bridge the funding gap.

Lucent, on the other hand, has a string of commitments coming due over the next few months that could strain its finances. For one, the company must raise $2 billion in nonoperating cash by September to satisfy a group of bank lenders. Lucent had hoped to raise that cash by selling its fiber optic business. But that deal, which was once expected to raise as much as $8 billion and is now seen garnering as little as $2 billion, as the market for telecom gear continues to deteriorate, remains on hold. Lucent also faces a July 15 deadline for a $750 million bond repayment or refinancing, though a representative says the company is on track to meet that deadline.

Piggy Bank?

Bondholders aren't the only people lining up to be paid by Lucent. Acting like a bank to its customers, Lucent has made $6.9 billion worth of loan commitments to phone companies buying Lucent gear (customers have drawn down $2.8 billion worth). If failed telco Winstar is any example, struggling phone companies could soon be suing Lucent for their promised loans.

Appearing thrifty by comparison, Nortel has committed to lend $2.8 billion to customers (it has actually lent $1.9 billion). While still substantial, Nortel's exposure to credit risk is smaller, which means less to worry about for investors.

And while Nortel still has plenty of room to maneuver as it seeks to raise cash, the new junk rating and a series of covenants on the $6.5 billion financing it raised earlier this year narrow Lucent's options significantly.

Industrywide equipment sales are showing little sign of rebounding. In fact, this year has already been written off as a disaster by some experts. So Lucent faces the grim choice of having to conduct a fire sale, putting assets such as corporate real estate, receivables and additional business units on the block.

"From our seat," says Reynolds, "it seems Lucent could have another billion-dollar hole to fill."