Alcatel-Lucent cut to 'Ba3' as profitability falls below expectations - Moody's

MUMBAI (Thomson Financial) - Moody's Investors Service downgraded to 'Ba3' from 'Ba2' the corporate family rating and senior debt of Alcatel-Lucent, saying the company's profitability and cash generation has fallen behind the agency's expectations since the merger of Alcatel and Lucent.

The trust preferred notes of Lucent Technologies Capital Trust I have been downgraded to 'B2' from 'B1'. At the same time, Moody's affirmed its 'Not-Prime' rating for short term debt of Alcatel-Lucent. The outlook for the ratings is stable.

"While Alcatel-Lucent has realized a large part of the scheduled cost savings in 2007, it retained only part of it, so that Alcatel-Lucent's interest coverage was below 0.5-times for the last twelve months to Sept 2007 and it has consumed around 1.3 bln eur cash, including outflows for restructuring and dividend distributions in the same period," noted Wolfgang Draack, Moody's senior vice president and lead analyst for Alcatel-Lucent.

"Were this trend to continue, then the company would increasingly absorb its financial flexibility," he warned.

The stable outlook incorporates the expectation that price pressure in the market will somewhat abate and management will focus more on improving gross profit, and that management's restructuring plan will generate and retain substantially more cost savings going forward.

It also reflects hopes that a trend towards the targeted double-digit operating margins becomes visible in the company's results and that a seasonally cash-generative fourth quarter 2007, before restructuring, will reduce cash consumption for this year, with profitability improvements proving sufficient to fund future cash cost of restructuring. jro COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved.

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