Ericsson Taken Aback by Moody's Downgrade
By REUTERS
Filed at 7:42 a.m. ET
STOCKHOLM (Reuters) - Telecoms equipment maker Ericsson expressed surprise on Tuesday after ratings agency Moody's Investors Services consigned its long-term debt deeper into junk territory.
The downgrade by two notches to B1 -- Moody's fourth highest ``junk'' grade -- from Ba2, with a negative outlook, initially hit the loss-making Swedish group's stock, but it soon rebounded to trade flat. Its bonds also held their ground.
Ericsson said it stuck to guidance issued earlier this month after Moody's expressed concern about the rate of revenue decline.
``I can... confirm that we have the same view of the market today as we had when we announced our (full-year) result, we haven't changed anything,'' said Ericsson spokeswoman Pia Gideon. ``We are quite surprised.''
``We stick to the forecasts we have announced earlier. We have the same view of the market.''
She said the downgrade would increase debt-servicing costs by only 110 million crowns ($12.95 million) annually.
Ericsson shares, which plunged last year and have lost seven percent so far in 2003, outperforming the DJ Stoxx tech index by 11 percent, first fell four percent on a negative Stockholm bourse, but were flat at 6.55 crowns by 7:30 a.m. EST.
Telefon AB LM Ericsson, the world's biggest maker of mobile networks, has made losses for more than two years as demand from debt-laden telecoms operators dwindles. This month it said demand for wireless telephone networks would be flat to down 10 percent this year, with the lower end of the range more likely.
``The negative outlook for the ratings reflects the low visibility of telecom operator spending and the potential for a persistent high rate of decline for Ericsson's revenues that could cause erosion of the company's high cash reserves,'' Moody's said in a statement.
It was concerned revenues may continue declining by more than 30 percent through most of 2003 and stabilization may not come before next year: ``This scenario would result in a need for additional restructuring measures for Ericsson, which because of their severity, carry material execution risk.''
But at current spending estimates, Ericsson's free liquidity would last well beyond 2003, it said. Last year, Ericsson boosted its finances with a $3.2 billion rights issue.
EXPECTED MOVE
Moody's had already warned it might cut because of a drop in fourth-quarter revenue and cautious sales outlook. Bear Stearns said that in light of a B1 rating for French peer Alcatel, Moody's move on Ericsson was already overdue.
``With concerns remaining regarding how Ericsson can turn its business around and the company already facing a tough task to fully implement its existing restructuring program further downgrades cannot be ruled out,'' it said in a note.
One analyst said the downgrade was deeper than some expected but the share fall was partly due to Monday's overdone rise of 7.4 percent, after handset joint venture Sony Ericsson presented its first 3G phone and said it hoped for profits in 2003. Another analyst said reaction was tempered by recent news that Carl-Henric Svanberg would take over as chief executive.
Svanberg, who headed the top world lockmaker Assa Abloy, replaces Kurt Hellstrom who was criticized for allowing costs to spin out of control. With most cost-cutting plans already in place, Svanberg must ensure the workforce drops to under 60,000 by the end of this year from 64,000.
Dealers said Ericsson's 3.625 percent euro bond due July 2004 was unchanged at 91.5 percent of face value in early trade. The cost of insuring Ericsson's debt against default for five years in the credit default swap market was also steady at 9.75 percent of the amount at risk.
``In view of low market visibility and ongoing downside risks, we regard the company's bonds as currently expensive and therefore maintain our underweight recommendation,'' SEB said.
Standard & Poor's and Fitch Ratings assign Ericsson a BB rating, roughly two notches higher than Moody's new rating.
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