Moody's rates Lucent convertibles Caa1

Moody's Investors Service assigned a Caa1 rating to Lucent's new convertible senior debt and confirmed its Caa1 senior unsecured, Caa3 trust preferred and Ca convertible preferred stock ratings. The outlook remains negative.

Moody's said the ratings reflect the continued weak outlook for capital spending among Lucent's key customers, the lack of clarity on the degree of further deterioration and the extent and timing of an eventual rebound, a continued sizable cash burn, the lack of access to a committed bank facility available for direct borrowings and the overhang of the convertible preferred put and lawsuit settlement, both of which are expected to occur by the end of August 2004.

Moody's added that the ratings also consider the financial flexibility provided by the proposed debt issue and the substantial progress the company has made in reducing its cost base, managing its working capital, controlling capital spending and rationing its spending to the most viable business opportunities.

As a means of further reducing the risk associated with the August 2004 put of the company's existing 8% convertible preferred stock issue and the proposed $315 million settlement of various lawsuits, Lucent is issuing approximately $1.3 billion in convertible senior debt, which are pari passu to the company's other senior unsecured debt obligations, Moody's said.

Moody's believes that issuance proceeds will significantly expend the date when liquidity could re-emerge as a concern again if end markets remain weak and cash burn continues. While the planned issue adds senior debt to Lucent's capital structure, the company has stated that it expects to apply the net proceeds toward the repayment or possible repurchase of certain short- and medium-term obligations over time, as well as for general corporate purposes.

Moody's said it believes that additional liquidity, rather than increased leverage and less favorable capital structure, is the salient near-term issue.

S&P rates Lucent convertibles B-

Standard & Poor's assigned a B- rating to Lucent Technologies Inc.'s new convertible senior debentures and confirmed its existing ratings including its corporate credit at B- and preferred stock at CCC-. The outlook is negative.

S&P said Lucent's ratings reflect continued uncertainty in the communications equipment industry, offset in part by the company's reduced operating losses, stabilizing cash flows, and sufficient operational liquidity.

Lucent reported sales of $2.4 billion for the March 2003 quarter, compared to $2.1 billion in the December 2002 quarter, S&P said. The March quarter's gross margin was 32% versus 22% in December and 23% in the year-ago period. Lucent is reducing its quarterly breakeven point to about $2.4 billion in quarterly revenues by the September 2003 fiscal year-end.

The company's operating losses have abated as it cut its costs, responding to continued weak business conditions, S&P said. Lucent's net loss from continuing operations for the March 2003 quarter was $351 million, compared to $264 million in the prior quarter. Excluding certain nonrecurring items and related tax effects, losses are smaller, reflecting cost reduction actions taken in the past several years, as communications carriers have materially cut capital expenses. Lucent expects to achieve gross margins in the mid 30s percentage area and is targeting a return to profitability by the September 2003 quarter, excluding the impact of non-operational items, such as the further repurchase of convertible securities.

While Lucent has made progress in cutting its costs, industry conditions remain highly challenging, S&P said. Carriers' spending plans are expected to remain depressed well into 2004, as they seek to offer acceptable levels of customer service while preserving capital.

Financial flexibility, beyond cash on hand, is limited, S&P said. In October 2002, Lucent cancelled an undrawn $1.5 billion revolving credit agreement and a $500 million accounts receivable sales program rather than being in default of the terms of these agreements. Concurrent with the debenture offering, Lucent also announced a new $600 million credit facility for new and existing letters of credit. Asset sales, if any, are not expected to be a material source of cash.

Fitch upgrades Reliant Resources

Fitch Ratings upgraded Reliant Resources, Inc.'s indicative senior unsecured debt rating to B from CCC+ and removed it from Rating Watch Positive where it was placed on April 1. The outlook is stable.

Fitch said the action follows Reliant's successful restructuring of $5.9 billion of bank credit facilities in March 2003 and incorporates Fitch's review of the company's current and prospective credit profile.

Revised bank terms have eliminated much of the uncertainty surrounding Reliant's near-term liquidity position and should provide the company with the flexibility to access the debt capital markets over time, Fitch said. Importantly, terms and conditions do not place any immediate pressure on Reliant to sell assets and/or tap alternative sources of capital as Reliant will not be required to make any mandatory principal payments prior to May 15, 2006.

Reliant's ratings recognize the weak performance of the company's wholesale merchant power segment and the high debt leverage stemming from the 2002 acquisition of Orion Power, Fitch said. Wholesale segment performance is expected to remain depressed through 2003-2004 due to weak supply/demand fundamentals and losses in 2003 associated with the wind down of speculative trading activities.

A positive consideration is the ongoing profitability and strong cash flow contributed by Reliant's Texas based retail electric operations, Fitch said. Since the implementation of Texas electric deregulation in January 2002, retail operations have performed as designed, providing a partial hedge against wholesale earnings volatility. In particular, retail margins have benefited from Reliant's ability to lock in favorable wholesale gas and power prices. In addition, customer loss has been lower than originally anticipated.

Reliant's current financial profile is overly leveraged, especially given cyclical commodity market conditions which have significantly reduced realized returns on the company's generating portfolio.

Consolidated debt to EBITDA, adjusted to include off-balance sheet debt and certain non-recourse project financings, currently approximates 6.0 times, Fitch said. In addition, Reliant's consolidated capital structure includes more than $2 billion of secured subsidiary debt and lease obligations with terms that limit RRI's ability to upstream cash dividends for debt service at the corporate level.

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