Telefon AB L.M. Ericsson (ERICY), one of Europe's largest technology companies, faces the prospect of seeing its debt downgraded to junk status, Monday's Wall Street Journal reported.
Although the world's leading supplier of mobile-network equipment said its planned 30 billion kronor ($3.25 billion) share offering will be fully underwritten, the shares are being offered at a heavy discount. Ericsson also posted second-quarter results that reveal how desperately it needs the cash and said its market is deteriorating faster than expected.
The news sent the Swedish company's shares down 18%, or 2.60 kronor, to 11.90 kronor in Stockholm and, analysts believe, may trigger further downgrades by ratings agencies Moody's Investors Service and Standard & Poor's.
Roger Appleyard, a credit analyst with ABN Amro, said he believes it will now be "nigh" impossible for the company to become profitable in early 2003 as Moody's envisioned when it downgraded Ericsson's long-term debt rating to one notch above junk status in June. Mr. Appleyard believes both Moody's and S&P will downgrade Ericsson's long-term debt to junk, which implies that there is a reasonable chance the company will default. Such a rating typically makes its more difficult to raise cash and can scare off conservative investors.
While Ericsson doesn't have any immediate liquidity problems, Mr. Appleyard said continuing operating losses combined with restructuring costs will soon take their toll. "In nine to 12 months, their cash flow could start to look very stretched," he said. "In a year's time, they could be at crisis level."
Moody's analysts, who have Ericsson's rating on a negative outlook, were unavailable to comment on Friday. A spokeswoman for S&P, which rates Ericsson's debt two notches above junk, declined to comment.
If Ericsson's debt is lowered to junk status, it would be another example of how the collapse in spending by the telecommunications industry has reduced some of Europe's biggest blue-chip technology stocks to high-risk propositions.
Sten Fornell, chief financial officer of Ericsson, said a downgrade would increase the interest costs on the company's debts, but the impact would be manageable. In any case, Ericsson is aiming to become profitable in 2003 by cutting its cost base so that it can break even on annual revenue of 120 billion kronor, compared with 232 billion kronor in 2001. An Ericsson spokesman said the cost-cutting program, which aims to lower the work force to 65,000 from 76,000 by early next year, should give the company plenty of financial leeway.
Indeed, the news that Ericsson's share offering will be fully underwritten boosted the company's euro-denominated bonds expiring in 2006 by about three points Friday to trade at 86.5% of their face value. Moreover, Ericsson's second-quarter operating loss of 2.7 billion kronor, reported Friday, wasn't as bad as many analysts had feared. The company posted a net loss of 3.5 billion kronor, compared with a loss of 14.1 billion kronor last year. Revenue fell 31% to 38.5 billion kronor from 55.5 billion kronor.
