Alcatel Junked

Things look beret bleak for Alcatel as it becomes latest telecom company to have its debt downgraded to junk status

July 10, 2002

3 Min Read
Alcatel Junked

Alcatel SA (NYSE: ALA; Paris: CGEP:PA) has joined a long list of telecom companies that have seen their debt hit junk status.

Yesterday Moody's Investors Service downgraded the company’s senior long-term debt to Ba1 -- one notch below investment grade. A similar change was made to its shorter-term debt as well. Many in the industry believe that Standard & Poor's will soon also downgrade the debt to below investment grade. Alcatel warned last week that its debt could be downgraded, confirming in a statement that both Moody’s and Standard & Poor’s had it on a negative watch list.

Alcatel insists that its credit line with lenders hasn’t been hurt and that it is in no immediate financial crisis. The company, which has over €5 billion (US$4.95 billion) of bond debt, also has a significant cash position: nearly €4 billion ($3.96 billion).

Moody's blamed the downgrade on declining overall market conditions. With service providers like WorldCom Inc. (Nasdaq: WCOM), Qwest Communications International Inc. (NYSE: Q), and Global Crossing Ventures either filing for bankruptcy, or teetering on the edge of it, the outlook in the telecom equipment space looks bleak (see Qwest Trashes Junk Rating and GlobalX: The Burst Bubble).

“Management has prepared the company well financially for the expected period of earnings pressure, by shoring up cash liquidity and reducing overall debt," said the agency. "However, Alcatel's ample liquidity today is likely to erode over time, if its market continues to decline rapidly."

Alcatel’s competitors Nortel Networks Corp. (NYSE/Toronto: NT) and Lucent Technologies Inc. (NYSE: LU) have already seen their bonds hit junk status. Still, the company says it is determined to get its investment grade status rating back. But experts believe this is highly unlikely.

“Debt never really recovers once it has gotten this low,” says one bond salesman.

In fact, Lucent’s bonds, which were downgraded to junk status in June of 2001, are still trading below investment grade. Nortel bonds, which were downgraded in April, are also still trading at junk status (see Moody's Junks Nortel Debt).

The reduction in bond rating isn’t exactly a crisis. Pressure from some institutional investors that can’t invest in junk-status bonds has helped pushed the stock down a bit. But judging from the stock price, investors haven’t panicked. The stock is currently trading down $0.27 (4.36%) to $5.92.

The company still has some time to get things back in order. Its first major bond payments aren’t due until September 2003. And Alcatel has already started working toward reducing its expenses. So far it has laid off roughly 30,000 employees, and last month the company warned it would likely cut another 10,000 jobs by the end of the year.

Over the next year, the company will have to come up with other ways to raise capital. They have several options, say experts. One option is to sell more shares, which would dilute current shareholders but would raise some cash. They could also do an equity-for-debt swap to help wipe their books clean.

At the end of the day, the only thing that will really get Alcatel and the rest of the telecom companies out of trouble is an overall recovery in the market. Declining revenues will only exacerbate problems, but greatly improved revenues could help the company pay down its debt and keep it from acquiring new debt.

Unfortunately, that prospect looks to be a long way off.

— Marguerite Reardon, Senior Editor, Light Reading

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