Moody's Downgrade Only Highlights Key Risks of Alcatel-Lucent

Alcatel-Lucent SA (NYSE: ALU) looks like it more than just challenged. As it is on the road to being one of the next great penny stocks (a dubious honor), Moody's has downgraded the rating for the troubled telecom and communications equipment provider.

The rating today affects 4.6 billion euros of rated instruments. Moody's Investors Service has cut the corporate family rating and probability of default rating to B3 from B2. Moody's has also downgraded Alcatel-Lucent's senior debt ratings to Caa1, with a loss given default assessment of 5 (LGD5, 75%), from B3, LGD5 (75%).

In addition, Moody's downgraded the ratings on two convertibel bonds issued by Lucent from before the merger. These were cut to Caa2, LGD5 (79%), from Caa1, LGD5 (77%). But wait, more downgrades are left on the table for the future. Moody's went on to say that the outlook on all ratings remains negative.

Today's credit downgrade is on the expectation that in 2012 the company will not be able to cut its cash burn materially below the 2011 level of approximately EUR620 million. Significant uncertainty remains about Alcatel-Lucent's ability to significantly reduce its free cash outflows in 2013 and move towards break-even thereafter.

After maturities in 2013, Alcatel-Lucent's next large debt maturities are its 6.375% bonds due in April 2014, with EUR462 million currently outstanding and the EUR1.0 billion 5% Oceane due in January 2015. Moody's said, "The negative outlook on Alcatel-Lucent's rating reflects the company's ongoing cash burn relative to its substantial, but finite, liquidity. With an outlook for declining sales in 2012, Moody's considers that Alcatel-Lucent's management will be challenged to cut costs fast enough to curb cash consumption and to realise opportunities for asset monetisation."

Somehow Alcatel-Lucent shares are still up 5% at $1.155 against a 52-week range of $0.91 to $2.66.

JON C. OGG

Filed under: 24/7 Wall St. Wire, Analyst Calls, Technology, Technology Companies, Telecom & Wireless Tagged: ALU