Lucent Technologies Inc. got into financial trouble when it started financing equipment purchases for its customers, many of which had questionable ability to pay their debts. With the market's wheel turning full circle, Lucent's debt rating was formally downgraded to junk bond status by Standard & Poor's Corp. on Tuesday.
Lucent's downgrade to BB+ from a BBB- corporate credit rating "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," according to a statement from S&P, which provides financial ratings and analysis.
The downgrade will likely make raising capital more difficult in the debt markets, and will cost the company US$10 million in additional bank fees on its $4 billion credit line. Lucent must raise $2 billion as a condition for this credit, and intends to spin off its fiber optics unit to pay for it. S&P put the company on a watch list after its Agere Systems Inc. spin-off came in US$2 billion short in its initial public offering.
A Lucent spokeswoman said Lucent had always known a credit downgrade was a possibility, but doesn't expect it to significantly impact the company's business. As of its last financial statement for the quarter ending in March, Lucent carried $2.3 billion in short-term debt and $3.1 billion in long-term debt.
S&P said its outlook for Lucent is negative, citing deteriorating demand for telecommunication equipment, an overall weak market and Lucent's "subpar vendor finance portfolio." The rating agency expects Lucent to achieve operating profitability by the first half of 2002.