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Credit rating agency Moody's Investors Service delivered a bleak verdict on the telecom equipment sector's prospects on Friday, when it downgraded Nortel Networks Corp and Lucent Technologies Inc from junk to even junkier.

The rating on Lucent's senior unsecured and senior implied debt was cut from B2 to Caa1. Lucent's trust preferred stock was cut from Caa1 to Caa3, and preferred stock from Caa2 to Ca. Nortel's senior secured and senior implied rating was cut from Ba3 to B3, and its preferred stock from B3 to Caa3. Bonds rated by Moody's at Ba or below are considered to be in the junk category. The outlook for both companies was rated negative.

Moody's used eerily similar language when describing the problems facing both companies. It said that the downgrade reflected the severity of the decline in each firm's revenue base, their cash burn rates and the "lack of clarity regarding the nature and timing of a rebound in revenue." It also cited reduced liquidity sources in the case of Lucent and diminished financial flexibility in the case of Nortel.

Offsetting the bleak prospects facing both firms, Moody's cited their large cash balances and their reduced cost structures. However, both firms are likely to see their cash come under pressure over the coming year, with carriers likely to continue cutting their spending at least through next year.

© Computerwire

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