-- 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
-- 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.
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.
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
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,
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.
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
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
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
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
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
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 Affirmed; CreditWatch/Outlook Action
Corporate Credit Rating B/Negative/B B/Stable/B
Alcatel-Lucent USA Inc.
Corporate Credit Rating B/Negative/-- B/Stable/--
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
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