Approximately EUR4.6 billion of rated instruments affected
Frankfurt am Main, December 04, 2012 -- Moody's Investors Service has today downgraded Alcatel-Lucent's corporate family rating (CFR) and probability of default rating (PDR) to B3 from B2. Concurrently, Moody's has 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, the rating agency has downgraded to Caa2, LGD5 (79%), from Caa1, LGD5 (77%), the ratings on two convertible bonds issued by Lucent Technologies, Inc., before its 2006 merger with Alcatel, and guaranteed by Alcatel-Lucent on a subordinated basis. The outlook on all ratings remains negative.
"Today's one-notch downgrade of Alcatel-Lucent's CFR was driven by our expectation that in 2012 the company will not be able to cut its cash burn materially below the 2011 level of approximately EUR620 million as adjusted by Moody's," says Roberto Pozzi, a Moody's Vice President -- Senior Analyst and lead analyst for Alcatel-Lucent. Alcatel-Lucent's previous B2 rating had been partly based on Moody's assumption that the company's cash burn would be no more than EUR300 million for 2012, as adjusted by Moody's. "This inability to reduce cash burn reflects (1) a contraction in Alcatel-Lucent's revenues of around 7% year-on-year in the first nine months of 2012, and (2) continued weakness in the company's gross profit margins, which necessitates renewed restructuring efforts," adds Mr. Pozzi.
Moody's also considers that significant uncertainty remains about Alcatel-Lucent's ability to significantly reduce its free cash outflows in 2013 and move towards break-even thereafter. The rating agency notes that the company has been consuming cash from operations since the 2006 merger between Alcatel and Lucent Technologies, Inc. and that its cash burn increased to EUR885 million in the 12 months to September 2012 from approximately EUR620 million as of FY2011 on a Moody's adjusted basis.
Usually Alcatel-Lucent's cash flow is back-ended, so that the only cash-generative quarter of any one year is Q4. In 2012, Moody's expects that Alcatel-Lucent's fourth-quarter cash flows will only partly offset the company's cash consumption in the third quarter (EUR360 million as reported by the company) and that the company's cash consumption during the second half of 2012 will remain negative. Moreover, Alcatel-Lucent has implemented new cost-saving measures, which are aimed at generating additional cost savings of EUR750 million in 2013. However, although these may eventually strengthen the company's operating cash flows, Moody's cautions that its past efforts have been absorbed by deteriorating macro environment and price pressure in the market, which continues unabated given similar cost-cutting measures by competitors. Also, despite increasing communication traffic flows, there is currently no visibility with regard to a recovery in demand for telecommunication equipment. Because of this and telecom operators' currently restrained investment strategies (except for some operators in the Americas), Moody's believes that revenue contraction in the industry could continue for several quarters.
Alcatel-Lucent's liquidity profile is good based on the availability of around EUR4.7 billion in cash and marketable securities at end of September 2012. After consideration of cash needs for operations (typically estimated by Moody's at 3% of sales, or around EUR500 million) and about EUR1.2 billion cash and marketable securities held in countries subject to exchange controls, the liquidity well covers upcoming debt maturities of around EUR860 million in the next 12 months to June 2013 including the US$765 million (EUR619 million as reported in the company's third-quarter 2012 results) 2.875% Series B convertible bonds due in 2025, with a 15 June 2013 put option and leaves headroom for potential cash consumption in operations. The EUR837 million revolving credit facility matures in April 2013 and is currently undrawn. The facility has a financial leverage covenant related to cash flow/net debt with reasonable headroom as a result of the net cash position currently reported.
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. Given the scale of Alcatel-Lucent's cash consumption and the company's upcoming debt maturities, Moody's considers that cash and short-term securities balances are not as comfortable as they appear at first glance. Alcatel-Lucent's liquidity could be bolstered by increased royalty collections, such as those resulting from the company's agreement with RPX or from own efforts, or proceeds from potential business exits, but overall its options for further asset monetisation appear to be decreasing.
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.
WHAT COULD CHANGE THE RATINGS DOWN/UP
Negative pressure on the B3 rating would increase if (1) the company's operating margin, as adjusted by Alcatel-Lucent, fails to trend towards the mid-single-digits in percentage terms in 2013, with further tangible improvements thereafter; (2) Alcatel-Lucent fails to maintain its negative free cash flow below EUR500 million on a last 12 month basis throughout 2013, as adjusted by Moody's; (3) the company's debt/EBITDA fails to improve towards 6.0x as adjusted by Moody's; or (4) the company fails to improve its liquidity position through asset disposals and/or refinancing well ahead of its debt maturities in 2013-14. Rating pressure could ease and the outlook on the rating stabilise if all the above conditions are met, with particular regard to an improvement in free cash flow generation.
Although currently unlikely, upward rating pressure would require Alcatel-Lucent to (1) generate significant positive free cash flow on a last-12-months basis, as adjusted by Moody's; (2) sustain sales growth; and (3) achieve an operating margin, as adjusted by Alcatel-Lucent, in the mid-single digits in percentage terms.
The principal methodology used in rating Alcatel-Lucent was Global Communications Equipment Industry rating methodology published in June 2008. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the US, Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Headquartered in Paris, France, Alcatel-Lucent is one of the world leaders in providing advanced solutions for telecommunications systems and equipment to service providers, enterprises and governments. The company reported sales of EUR6.8 billion in H1 2012.
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Roberto Pozzi Vice President - Senior Analyst Corporate Finance Group Moody'sDeutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Matthias Hellstern Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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