LU an NT are run for the creditors now. The companies have to do what they agreed with the creditors. I would like to no the: or else...
Lucent: Devil in the Details?
Overview
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Imagine a document 257 pages long, weighing nearly four pounds in paper form, governing virtually every aspect of a company’s financial requirements over the next 12 months.
For Lucent Technologies Inc. (NYSE: LU - message board), that document exists, in the form of an 8-K form filed with the Securities and Exchange Commission last February. At that time, Lucent raised $6.5 billion in revolving credit, which was sold to banks by underwriters Salomon Smith Barney and J.P. Morgan Chase. The government required the company to file the details of that debt agreement in the form of the 8-K.
Four months later, the document is still being heavily scrutinized, and is key to the prognosis of Lucent’s turnaround bid.
So what’s the big deal?
As the document says, “The Credit Facilities are secured by substantially all of Lucent’s assets…”
In other words, in the event of default on the agreement, the banks can lay claim to every piece of Lucent. The 8-K details some complex and strict financial covenants. If these covenants are broken, Lucent would be in default of the debt.
"Many people are worried about these covenants," says one hedge-fund manager, asking to remain unnamed. Recently, the loan covenants have generated a bit of Wall Street discussion — and are likely to have contributed to recent weakness in Lucent’s stock price.
As detailed in the public filing and interpreted by several analysts, some of the key covenants on the debt agreement are as follows:
Cash covenant for Agere Systems (NYSE: AGR - message board) spinoff: Lucent must raise $2.5 billion in cash by the end of September in order to spin off the shares of Agere Systems to shareholders (the company has already raised approximately $500 million of that cash). Failing to spin off Agere does not put Lucent in default, but it complicates its outlined recovery plan.
Net Worth covenant: Lucent must maintain a net worth (stockholder’s equity, or book value) of $23 billion on the last day of any fiscal quarter, including the value of both Lucent and Agere. At the end of the last quarter, that number stood near $30 billion.
EBITDA covenant: Lucent must reach certain targets of EBITDA (earnings before interest, taxes, depreciation, and amortization) in every quarter for the next year, according to a schedule set up by the agreement.
Among these covenants, the third is most perplexing to analysts, several of whom say they aren’t sure how to calculate the financial figures prescribed in the agreement.
Creditors say Nortel must cut losses, turn profit
By Reuters staff
28 December 2001
Telecommunications equipment maker Nortel Networks Corp., whose business has suffered on sagging demand from network carriers, must steadily pare losses and return to profitability over the next 21 months, as part of its amended agreement with creditors.
The company said as part of the amended credit agreement -- originally announced last week -- it can post a maximum loss on the level of earnings before taxes, interest, depreciation and amortization (EBITDA) of $350 million next year, according to U.S. Securities and Exchange Commission documents filed Wednesday.
For the 12 months ending September 30, 2003, Nortel must reach EBITDA profits of at least $350 million, it said in the SEC filing.
Brampton, Ontario-based Nortel warned on Friday that it would post a fourth-quarter net loss of 63 cents a share on weaker sales, including a $630 million restructuring charge and $900 million in acquisition-related costs and a write-down for the carrying value of certain assets.
North America's second largest telecom gear maker said the operating loss would be smaller than that of the third quarter, resulting in numbers better than analysts were expecting. Nortel posted a staggering $19 billion net loss in the second quarter, followed by a $3.5 billion net loss in the third-quarter.
Nortel and other telecom suppliers have shed jobs, cut money-losing products and sold businesses in an attempt to improve results amid a slowdown in customer spending that has caused revenues to decline.
Nortel also said last week it had amended the $2 billion, 364-day credit agreements that it entered into in June 2001, cutting the amount to $1.575 billion and extending the term to Dec. 13, 2002, from June 14, 2002. According to the SEC document, Nortel agreed it would post an EBITDA loss of no more than $500 million in the first quarter of 2002, $650 million in the first half and $700 million in the first nine months.
If Nortel were to report the maximum losses allowed under the agreement in the first nine months of 2002, it would have to report an EBITDA profit of at least $350 million in the fourth quarter in order to meet the requirement that its EBITDA losses for the full year be no more than $350 million.
The company also said its EBITDA profit in the 12 months from April 1, 2002, through March 31, 2003, would be no less than $50 million, according to SEC documents. Nortel's EBITDA would rise to at least $300 million in the 12 months from June 1, 2002, through July 31, 2003, and $350 million in the 12 months from Oct. 1, 2002, through Sept. 30, 2003, according to SEC documents.
Nortel said its consolidated tangible net worth will at no time be less than $1.88 billion, according to SEC documents. J.P. Morgan Chase & Co. is the administrative agent for the bank creditors.
Nortel spokeswoman Tina Warren declined further comment, although Chief Financial Officer Terry Hungle said last week the company was pleased with the extended term of the agreement and said the lower amount was appropriate given the company's progress on its restructuring plan.
Nortel has said it expected its overall work force to be about 52,000 by Dec. 31. At the height of the technology boom, it had more than 100,000 employees. The company said after its job cuts are completed, it will have a work force of about 48,000, up from earlier projections of 45,000. Nortel said the change is not expected to affect its target cost structure -- expected to be in place in the first quarter of 2002 -- that would see it break even at quarterly revenues below $4 billion. Shares of Nortel fell 1 cent to $7.06 on the New York Stock Exchange. In Toronto, the shares fell 13 cents to C$11.32. |
