Why is S&P Down on Alcatel-Lucent?

While Alcatel-Lucent’s (NYSE:ALU) shares have spiked since its financing deal was announced on December 14, the deal has also put the French telecom equipment supplier’s weak balance sheet and struggling business under intense scrutiny. As required by Goldman Sachs (NYSE:GS) and Credit Suisse (NYSE:CS), underwriters of the loan, Alcatel revealed the individual margins for each of its segments, and Standard & Poor’s Ratings Services did not like what it saw.

On Friday, S&P lowered its outlook on Alcatel-Lucent to Negative and affirmed its “B” rating on the company’s debt.

What was S&P’s negative outlook based on?

After burning through $386.5 million in its most-recently-reported quarter and averaging an annual cash burn rate of approximately $927 million, Alcatel-Lucent found itself in such dire financial straits that it was necessary to secure a 1.6 billion euro, or $2.1 billion, financing deal.

Catalysts are critical to discovering winning stocks. Check out our newest CHEAT SHEET stock picks now.

But the loan did not bring S&P any comfort.

“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,” read the rating services’ assessment. “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.”

Because of the company’s weak position, S&P has predicted its revenue will decline 3 percent year-over-year and its operating margins will drop to break-even levels in 2012, a decrease from 3.4 percent in 2011. However, 2013 will be slightly better; the ratings service forecast that its revenue will increase to the low-single-digits and its operating margins will rise to 3 percent.

The S&P’s negative outlook reflects the possibility of a one-notch downgrade over the next 6 to 12 months if Alcatel-Lucent’s strong cash position deteriorates. However the services’ outlook will be positively revised if the company can begin to generate break-even free cash flows on a sustainable basis.

Don’t Miss: AT&T’s Network Updates: Good for Apple, Good for Customers.

More Articles About:   , , , , ,