Gimme Credit says Lucent bondholders not compensated for restructuring risk

By Peter Heap

New York, May 5 - Lucent Technologies Inc. (Caa1/B-) bonds are trading at levels that do not sufficiently compensate holders for the risk of a restructuring, according to Gimme Credit analyst Kimberly Noland.

Nothing that prices have more than doubled since the lows of last fall, she wrote: "Our estimated enterprise value covers the senior debt at par but $9 billion of current market capitalization represented by junior securities would be impaired."

And she cautioned that the company could add more than $500 million of new secured bank debt ahead of its $3.3 billion of senior notes without triggering a negative pledge covenant.

Gimme Credit's downside case projects another 20% revenue decline in 2004 and estimates Lucent is worth 50% of revenues, or $3.8 billion.

Noland noted that market valuations of Lucent and comparable companies Nortel and Alcatel have risen from 0.3x revenues last fall to 1x for Lucent and 1.1x and 0.7x for Nortel and Alcatel, respectively.

However she said accurate valuation of any telecom equipment maker is problematic in a declining revenue environment.

Despite the problems, she added: "We believe Lucent's leading market position will prevent its liquidation."

Overall, Noland wrote: "Lucent is still very much in a race against time: it must make its cash last until carrier spending starts to grow again.

"The company now projects it will lose another $900 million in cash by the end of the fiscal year, leaving it with a cash balance of $2.5 billion. If there is no turnaround in carrier spending in the next 12 months, we estimate Lucent will have cash balances of just over $1 billion at the end of fiscal 2004."

With capital spending by the six major telecom operators down 20% in the first quarter, she said increased carrier spending is unlikely near term as the big companies "contemplate industry consolidation and their own debt-ridden balance sheets."

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