TEXT-S&P revises Alcatel-Lucent outlook to negative

Mon Aug 13, 2012 9:59am EDT

Overview
     -- We expect French telecommunications equipment supplier Alcatel-Lucent 
 to report higher cash flow losses in 2012 and 2013 than we
anticipated, due to telecom carriers' more cautious spending and fierce ongoing
competition. 
     -- We are revising our outlook on Alcatel-Lucent to negative from stable, 
but affirming the 'B' ratings.
     -- The negative outlook reflects the possibility of a downgrade over the 
next six to 12 months if the group's currently strong cash balances and 
adequate liquidity profile were impaired by continued significantly negative 
free cash flow or a lack of refinancing. 
 
Rating Action
On Aug. 13, 2012, Standard & Poor's Ratings Services revised its outlook on 
French telecom equipment supplier Alcatel-Lucent to negative from stable. At 
the same time, we affirmed our 'B' long-term and 'B' short-term corporate 
credit ratings on the company.


Rationale
The outlook revision primarily reflects our expectations of weak operating 
results and high cash flow losses in 2012, which if not contained in 2013 
could impair the group's still strong cash balances, which support the 
ratings. Furthermore, our assessment of the group's liquidity profile, which 
we currently view as "adequate" under our criteria, could also weaken in light 
of the group's expected cash flow losses and sizable upcoming debt maturities 
of EUR0.6 billion in 2013 and EUR0.5 billion in 2014. This is particularly the 
case if the group does not extend the maturity of its EUR837 million revolving 
credit facility (RCF), due in April 2013. 

In our base-case scenario, we forecast weaker revenues, margins, and free 
operating cash flows (FOCF) in 2012 and 2013 than in our previous base case. 
This is primarily due the group's weaker-than-expected first-half 2012 results 
and our anticipation of telecom carriers' continued cautious or delayed 
spending in light of high economic uncertainty, particularly in Europe, and 
fierce ongoing competitive pressure. Nevertheless, we expect seasonally 
stronger demand in the second half of 2012 and industry demand to catch up in 
2013. 

As a result, we forecast Alcatel-Lucent to report a year-on-year revenue 
decline of about 3% in 2012, followed by low-single-digit revenue growth in 
2013. In addition, we expect the group's operating margin (as adjusted by 
Alcatel-Lucent) to drop to about break-even levels in 2012, compared with 3.4% 
in 2011. In 2013, we expect the group's operating margins to improve modestly 
to about 3%, chiefly on the back of higher sales volumes, an improved revenue 
mix, and significant cost-cutting. In the first half of 2012, Alcatel Lucent's 
revenues declined by 10% year on year, and its operating margin dropped by 4.9 
percentage points to negative 3.7%. 

In our updated base-case assessment, we anticipate that Alcatel-Lucent's FOCF 
will deteriorate to about negative EUR650 million-EUR700 million in 2012,
compared 
with negative EUR539 million in 2011. This will mainly be due to higher 
operating losses and restructuring costs, which are only partly offset by 
modest working capital inflows and moderate proceeds from the group's plan to 
monetize its patent portfolio. We assume that the group will be able to 
generate about break-even FOCF in the second half of 2012, after negative FOCF 
of EUR674 million in the first half. 

Consequently, we expect the group's cash balances, including short-term 
marketable securities of EUR5 billion as of June 30, 2012, to remain largely 
unchanged at year-end 2012, which supports the current ratings. Nevertheless, 
we expect cash balances to deteriorate meaningfully in 2013, primarily due to 
the expected repayment of EUR0.6 billion in debt and moderate negative FOCF. We 
expect continued cash flow losses in 2013, primarily because of higher 
restructuring costs, which are only partly offset by the expected improvement 
in revenues and operating margins. 


Liquidity
The short-term rating on Alcatel-Lucent is 'B'. We view the group's liquidity 
as "adequate," as defined in our criteria, and calculate that liquidity 
sources should exceed liquidity needs by about 1.2x in the 12 months from June 
30, 2012, and by more than 1.3x in 2013.

As of June 30, 2012, we estimate the company's liquidity sources at about EUR2.7
billion for the next 12 months and at about EUR3 billion in 2013.

These include primarily:
     -- Surplus cash. As of June 30, 2012, we calculate surplus cash at about 
EUR2.5 billion. We deduct about EUR2.5 billion from the group's reported cash
and 
short-term marketable securities of EUR5.0 billion, which we consider to be tied
to the operations and seasonal working capital needs, or held in countries 
subject to exchange control restrictions (about EUR1.2 billion as of Dec. 31, 
2011), mainly China. The group conducts a significant proportion of its 
operations via a 50%-owned joint venture in China. In addition, because 
Alcatel-Lucent is active in many countries and has captive insurance and 
finance subsidiaries (both regulated), we believe that other material cash 
balances may not be immediately available for liquidity purposes. As of June 
30, 2012, the group reported cash and equivalents of EUR2.9 billion and 
short-term marketable securities of EUR2.1 billion; and 
     -- Moderate positive funds from operations (FFO) before capitalized 
development costs in 2012 and about EUR0.4 billion in 2013, compared with EUR0.2
billion in 2011.

We do not include the group's undrawn EUR837 million RCF in our 12-month 
liquidity assessment because the RCF matures in April 2013 and has not yet 
been refinanced.

We estimate liquidity uses of up to EUR2.2 billion. These mainly include:
     -- Annual capital expenditures of about EUR0.6 billion;
     -- Sold accounts receivable of more than EUR0.8 billion (Alcatel-Lucent 
reported outstanding amounts of EUR952 million as of Dec. 31, 2011, and EUR846 
million as of June 30, 2012). While we understand the sale of such receivables 
to be nonrecourse to Alcatel-Lucent, we view them as essentially short-term 
instruments and debt-like in nature; and
     -- Debt repayments of EUR0.6 billion in June 2013 if holders of the group's
Series B convertible bond ($765 million outstanding as of June 30, 2012) 
exercise their put options. We understand, however, that Alcatel-Lucent could 
choose to repay part of the convertible bond in shares.

We expect Alcatel-Lucent's cash flow generation to remain seasonal, including 
more favorable working capital developments in the fourth quarter than in 
other quarters. However, we also expect these patterns to be somewhat 
influenced by revenue developments and the company's working capital 
management.


Recovery analysis
The unsecured notes and the unsecured revolving facility issued by 
Alcatel-Lucent and its subsidiaries are rated 'B'. The recovery ratings on the 
notes and revolving facility remain at '4', indicating our expectation of 
average (30%-50%) recovery prospects for unsecured lenders. Furthermore, we 
maintain an issue rating of 'CCC' on the group's convertible trust preferred 
securities.

Our hypothetical default scenario concentrates on the company utilizing 
existing cash balances due to high operating losses, assuming a continually 
weak operating environment, with constrained capital expenditure budgets from 
telecom carriers and increased competition among telecom network equipment 
providers. In addition, we assume that research and development costs will 
remain significant as the company continues to develop products to remain 
innovative. We also assume meaningful restructuring costs in light of falling 
revenues and intense price pressure.

We estimate the group's stressed enterprise value at the hypothetical point of 
default in 2015 at about EUR3.2 billion. In addition, we assume that 
Alcatel-Lucent would repay debt on the path to default through cash balances 
and that holders of the Series B convertible notes would exercise their put 
options in 2013. However, we also assume that Alcatel-Lucent would retain an 
RCF, leading to average (30%-50%) recovery prospects for noteholders after 
deducting prior-ranking claims. We note that recovery prospects may be weaker 
than we currently envisage should the company incur secured debt on the path 
to default, for example, if Alcatel-Lucent were to refinance its RCF on a 
secured basis.

Outlook
The negative outlook reflects the possibility of a one-notch downgrade over 
the next six to 12 months if Alcatel-Lucent's currently strong cash position 
or adequate liquidity profile were impaired by significantly negative free 
cash flow generation through 2013. This could result from continually weak 
economic conditions, fierce competition, ineffective cost-cutting measures, or 
lower-than-expected proceeds from the patent monetization plan. In addition, 
we could take a negative view if the group did not extend the existing RCF in 
2012 or if capacity under this facility materially declined.

We could revise the outlook to stable, if Alcatel-Lucent were able to generate 
about break-even free cash flow on a sustainable basis. We would also expect 
the group to maintain an adequate liquidity position, including meaningful 
cash balances and capacity under its RCF.

Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit 
Portal, unless otherwise stated.
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Criteria Guidelines For Recovery Ratings On Global Industrials 
Issuers' Speculative-Grade Debt, Aug. 10, 2009
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
                                        To                 From
Alcatel-Lucent
 Corporate Credit Rating                B/Negative/B       B/Stable/B

Alcatel-Lucent USA Inc.
 Corporate Credit Rating                B/Negative/--      B/Stable/--

Ratings Affirmed
Alcatel-Lucent
Senior Unsecured (2 issues)*            B                  
   Recovery Rating                      4                  
Senior Unsecured (2 issues)             B                  
   Recovery Rating                      4                  

Alcatel-Lucent USA Inc.
 Senior Unsecured(4)                     B                  
   Recovery Rating                      4                  
 Preferred Stock                        CCC                

*Guaranteed by Alcatel-Lucent USA Inc.
(4)Guaranteed by Alcatel-Lucent.


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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