Moody's Assigns Provisional (P)83 Rating to Alcatel (ALU) Unit Notes Offering
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Moody's Investors Service has today assigned a provisional (P)B3 rating to the proposed USD650 million senior unsecured notes due in 2017 issued by Alcatel-Lucent USA Inc., a wholly owned subsidiary of Alcatel-Lucent (NYSE: ALU)(B3 stable). The senior unsecured notes are unconditionally and irrevocably guaranteed by Alcatel-Lucent and certain of its subsidiaries. The corporate family rating (CFR), probability of default rating (PDR) and rating outlook of Alcatel-Lucent remain unchanged.
Moody's issues provisional ratings for debt instruments in advance of the final sale of securities or conclusion of credit agreements. Upon a conclusive review of the final documentation, Moody's will endeavor to assign a definitive rating to the rated capital instruments. A definitive rating may differ from a provisional rating.
RATINGS RATIONALE
-- ASSIGNMENT OF (P)B3 RATING TO SENIOR UNSECURED NOTES --
The (P)B3 rating on the senior unsecured notes issued by Alcatel-Lucent USA reflects (1) their unsecured nature and hence their junior position in Alcatel-Lucent's capital structure behind the senior secured debt raised by the same entity; and (2) the senior unsecured guarantees from Alcatel-Lucent and certain subsidiaries, which rank pari passu with the other senior debt of the guarantors.
For the 12-month period ending 30 September 2013, initial guarantors and the issuer represented 53.86% of gross assets and 49.00% of group revenues. Moody's notes that the value of the guarantees could be impaired given that in certain situations (e.g., sale, liquidation, merger) a guarantor might be released from its guarantee without the consent of the noteholders. Moreover, the laws of certain jurisdictions may limit the enforceability of some guarantees, whilst certain guarantees contain limitations.
-- POSITIONING OF THE CORPORATE FAMILY RATING --
The B3 rating (Corporate Family Rating, or "CFR") reflects the company's persistent negative profitability and large negative free cash flows stemming from a highly competitive industry, subdued investments from telecom operators and aggressive marketing strategies of major competitors. These credit negatives are to some extent compensated by the company's entrenched market positions and long standing customer relationships, its large installed base, and a solid liquidity position with a moderate leverage on a net of cash basis.
In June 2013, Alcatel-Lucent announced a new strategic plan that, in essence, will reposition the company's focus predominantly on becoming an IP Networking and Ultra Broadband specialist and to manage its Access activities for cash. The B3 rating incorporates the expectation that Alcatel-Lucent will generate low but improving levels of operating profitability as a result of its ongoing cost reduction plan and, longer term, of its recent strategic re-focusing towards Core Networking (IP routing, IP transport and IP platforms). Nevertheless, we believe that it will be challenging for Alcatel-Lucent to achieve its targets, taking into account historical track record and the competitive industry environment.
The change in the rating outlook on Alcatel-Lucent's B3 rating to stable from negative on 7 November 2013 reflects the further improvement in the company's liquidity and debt maturity profile as a result of four refinancing transactions since the beginning of 2013. The stable outlook also reflects the company's announcement that it will undertake an underwritten capital raising approximately equivalent to its negative free cash flow expected in 2013. The proposed transaction will provide the company with greater flexibility to execute its ongoing restructuring plan.
WHAT COULD CHANGE THE RATING UP/DOWN
Negative pressure would be exerted on the B3 rating if Alcatel-Lucent's ongoing restructuring plan fails to gain traction such that (1) the company's operating margin (as adjusted by Alcatel-Lucent) fails to trend towards the mid-single digits in percentage terms; (2) it is unable to reduce its negative free cash flows (Moody's-adjusted) over the next 12-18 months; (3) the company's debt/EBITDA does not improve towards 6.0x (Moody's-adjusted); or (4) it is unable to maintain adequate liquidity.
Upward rating pressure would develop if Alcatel-Lucent shows evidence of sustained positive free cash flows and operating margins in the mid-single digits (as adjusted by Alcatel-Lucent) as well as improved leverage, as evidenced by a Debt/EBITDA ratio of approximately 6.0x.
PRINCIPAL METHODOLOGY
The principal methodology used in this rating was the Global Communications Equipment Industry published in June 2008. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Moody's issues provisional ratings for debt instruments in advance of the final sale of securities or conclusion of credit agreements. Upon a conclusive review of the final documentation, Moody's will endeavor to assign a definitive rating to the rated capital instruments. A definitive rating may differ from a provisional rating.
RATINGS RATIONALE
-- ASSIGNMENT OF (P)B3 RATING TO SENIOR UNSECURED NOTES --
The (P)B3 rating on the senior unsecured notes issued by Alcatel-Lucent USA reflects (1) their unsecured nature and hence their junior position in Alcatel-Lucent's capital structure behind the senior secured debt raised by the same entity; and (2) the senior unsecured guarantees from Alcatel-Lucent and certain subsidiaries, which rank pari passu with the other senior debt of the guarantors.
For the 12-month period ending 30 September 2013, initial guarantors and the issuer represented 53.86% of gross assets and 49.00% of group revenues. Moody's notes that the value of the guarantees could be impaired given that in certain situations (e.g., sale, liquidation, merger) a guarantor might be released from its guarantee without the consent of the noteholders. Moreover, the laws of certain jurisdictions may limit the enforceability of some guarantees, whilst certain guarantees contain limitations.
-- POSITIONING OF THE CORPORATE FAMILY RATING --
The B3 rating (Corporate Family Rating, or "CFR") reflects the company's persistent negative profitability and large negative free cash flows stemming from a highly competitive industry, subdued investments from telecom operators and aggressive marketing strategies of major competitors. These credit negatives are to some extent compensated by the company's entrenched market positions and long standing customer relationships, its large installed base, and a solid liquidity position with a moderate leverage on a net of cash basis.
In June 2013, Alcatel-Lucent announced a new strategic plan that, in essence, will reposition the company's focus predominantly on becoming an IP Networking and Ultra Broadband specialist and to manage its Access activities for cash. The B3 rating incorporates the expectation that Alcatel-Lucent will generate low but improving levels of operating profitability as a result of its ongoing cost reduction plan and, longer term, of its recent strategic re-focusing towards Core Networking (IP routing, IP transport and IP platforms). Nevertheless, we believe that it will be challenging for Alcatel-Lucent to achieve its targets, taking into account historical track record and the competitive industry environment.
The change in the rating outlook on Alcatel-Lucent's B3 rating to stable from negative on 7 November 2013 reflects the further improvement in the company's liquidity and debt maturity profile as a result of four refinancing transactions since the beginning of 2013. The stable outlook also reflects the company's announcement that it will undertake an underwritten capital raising approximately equivalent to its negative free cash flow expected in 2013. The proposed transaction will provide the company with greater flexibility to execute its ongoing restructuring plan.
WHAT COULD CHANGE THE RATING UP/DOWN
Negative pressure would be exerted on the B3 rating if Alcatel-Lucent's ongoing restructuring plan fails to gain traction such that (1) the company's operating margin (as adjusted by Alcatel-Lucent) fails to trend towards the mid-single digits in percentage terms; (2) it is unable to reduce its negative free cash flows (Moody's-adjusted) over the next 12-18 months; (3) the company's debt/EBITDA does not improve towards 6.0x (Moody's-adjusted); or (4) it is unable to maintain adequate liquidity.
Upward rating pressure would develop if Alcatel-Lucent shows evidence of sustained positive free cash flows and operating margins in the mid-single digits (as adjusted by Alcatel-Lucent) as well as improved leverage, as evidenced by a Debt/EBITDA ratio of approximately 6.0x.
PRINCIPAL METHODOLOGY
The principal methodology used in this rating was the Global Communications Equipment Industry published in June 2008. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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