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IN THE MONEY: The Lucent Lending Risk Revisited
27 Feb 08:15
By Rick Stine
A Dow Jones Newswires Column
(This story was originally published Monday)
NEW YORK (Dow Jones)--Thanks but no thanks.
That's the response a number of major Wall Street firms apparently gave
Lucent Technologies Inc. (LU) when the high-tech company was looking for some
credit and some underwriters for a huge initial public stock offering of one of
its units.
Hold on a second. A Wall Street underwriter walks away from millions of
dollars in commissions? Whaaaaz up?
The problem was that the two were linked. In other words, Lucent made it very
clear you don't get a piece of the potentially lucrative underwriting pie
unless you agree to lend us some money.
The question of who did pony up much needed credit to Lucent was partially
answered Monday when Lucent named the managers for the underwriting of Agere
Systems, an offering that if it goes off, will be one of the largest IPOs
brought to market. Leading the underwriting pack, as expected, was Morgan
Stanley Dean Witter (MWD). More on that in a minute.
Filling out the list were Bear Stearns, J.P. Morgan Securities, Smith Barney,
Deutsche Bank Alex. Brown, ABN AMRO Rothschild, SG Cowen Securities Corp. and
Blaylock & Partners. According to a filing with the Securities and Exchange
Commission on Monday, all but Blaylock agreed last week to extend credit to
Lucent.
Almost as interesting as who is on the list is who isn't: No Goldman Sachs;
No Credit Suisse/First Boston; No Merrill Lynch, and no Lehman Brothers.
In other words, this is an underwriting in which the bulge bracket doesn't
have a lot of bulge.
To be sure, those firms and others will likely participate in the syndicate
that sells the Agere shares. But the big bucks that come with being a manager
will be for someone else.
How things have changed pretty quickly for Lucent. Once upon a time Lucent
was a Wall Street darling. Because it had been spun off from AT&T in the
mid-1990s and because of its high-tech flavor, Lucent became one of the most
widely held stocks in the U.S.(AT&T was once the most widely held stock
itself).
But Lucent got itself into a little financial trouble. It made loans to
customers who haven't always made good on them. Business has slowed and its
lost money. Ratings agencies have threatened to lower Lucent's debt to junk
bond status. The company was shut out of the short-term lending market known as
commercial paper and until late last week, banks and other financial
institutions refused to extend a new credit line.
Oh, and the Securities and Exchange Commission is looking into accounting
irregularities.
Last week, this column was the first to report that Morgan Stanley, as lead
underwriter, was potentially taking on a lot of risk itself in connection with
the Agere IPO. Morgan Stanley had initially agreed to buy up to $2.5 billion of
Lucent debt, presumably in the bond market, that it would swap for shares of
Agere. Morgan would then sell those Agere shares in the IPO.
We told you last week that Morgan was possibly buying commercial paper
directly from Lucent as part of that debt exchange offer. That meant two
things: Morgan was taking on some of the most unsecure paper a company can
issue (and for a company like Lucent, with its recent problems, that's a risky
venture), and, that Lucent was increasing the amount of debt it had
outstanding.
An amended filing Agere made with the SEC on Monday fills in the blanks on
how much risk Morgan has taken on already: Since January, Morgan has purchased
$1.985 billion of commercial paper directly from Lucent. Morgan has been an
extremely important lender. It stepped up when others wouldn't. So, Morgan gets
to be lead underwriter for Agere.
True, Morgan will get compensated for that risk. Some short-term Lucent paper
that comes due in several months trades with a yield to maturity of around 12%.
While one can't imagine that's what Lucent is paying Morgan on the commercial
paper it recently issued, you can bet it's greater than the rate Lucent agreed
to pay the banks last week. Also true is that Morgan will have the commercial
paper secured by shares in Agere (those it receives as part of the exchange).
But if the Agere IPO doesn't happen because of a weak stock market, Morgan
has a boatload full of Lucent commercial paper, which at a minimum means it's
tied up capital it would probably like to be earning money on elsewhere.
And a weak market is a reality. That's behind the restructuring of the Agere
IPO preliminary terms that now call for each share to be sold from $12 and $14
a share rather than $16 to $19. The overall capitalization of Agere remains the
same; what changes are the overall number of shares to be sold (now 500 million
from 370 million), an increase in shares that Morgan Stanley would get, and
fewer shares for Lucent to distribute to its own holders later this year as
part of the original separation of Agere from Lucent.
If the Agere IPO goes off soon as planned, the remaining Agere shares held by
Lucent are worth about $10.85 billion, down from the $16.8 billion expected
just a little over a week ago.
Some of which might explain why the banks squeezed a little more out of
Lucent before agreeing to extend a credit facility last week.
Lucent, as part of its promise to reduce debt, is taking $2.5 billion it will
borrow from its banks and putting that cash on its books while putting the
obligation to repay the $2.5 billion loan on Agere. That loan is completely
secured by Agere's assets.
Let's say Agere wants to go out and raise money to do things like grow its
business. Fine, but the first $1 billion it borrows has to pay down some of
that bank loan. And, only when Agere has repaid $1.5 billion of that loan, and
assumingits debt is rated above junk bond status, will the remaining amount of
the bank loan become unsecured. In other words, the banks will only then remove
their lien to all of Agere's assets when they've been repaid $1.5 billion.
And that's not the only lien on Agere. According to SEC filings, Lucent's
banks demanded that its stake in Agere be used as part of the collateral
backing the new credit pacts. If Lucent doesn't meet certain financial tests
later this year, it may be prevented from spinning off Agere's shares to its
shareholders.
Back to the loans itself. Last week, Agere said in an SEC filing it expected
to make interest payments tied to the London Interbank Offered Rate. The
interest rate was expected to be LIBOR plus 125 basis points, or about 6.85%.
Now, the company is expecting to pay LIBOR plus 250 basis points, or about
7.84%. Higher risk means higher rates.
Not only that, but up until the time Agere pays down that $1.5 billion
mentioned above, every 90 days the interest rate will increase by 25 basis
points (a quarter of a percentage point).
Since Agere and Lucent have the same credit profile, you can bet the interest
rate charged to Agere is similar to what Lucent is paying.
Which brings us back to the host of Wall Street firms that didn't beat a path
to Murray Hill, N.J., to land a piece of the Agere IPO. To them, risk had a
price they weren't willing to pay.
(For the record, I own a small amount of both Lucent stock and Morgan Stanley
stock in an IRA account).
By Rick Stine; e-mail: rick.stine@dowjones.com; 201.938.5151.
(END) DOW JONES NEWS 02-27-01
08:15 AM |
