07/26 10:22 Ericsson Shares Decline as Moody's Cuts Credit Rating to Junk By Philip Lagerkranser
Stockholm, July 26 (Bloomberg) -- Ericsson AB shares fell as much as 25 percent after Moody's Investors Service lowered the credit rating of the world's largest cellular-equipment maker to junk level and said more cuts may follow.
Moody's reduced the long-term debt rating one step to Ba1 from Baa3. Morgan Stanley and other banks underwriting the bulk of the Swedish company's $3.3 billion share sale can back out if the rating drops another three levels. Ericsson shares fell as much as 2.4 kronor to 7.2 kronor, the lowest since March 1993.
Ericsson has agreed to sell new shares at 1992 prices because it needs the cash to pay back debt and cover costs for job cuts. The banks' obligation to underwrite the sale ceases if Standard & Poor's lowers its rating to BB- or if Moody's reduces its rating to B1, Ericsson spokesman Mads Madsen said.
``I don't think you can fully rule out the possibility that the agencies could take it down that far,'' said Duncan Warwick- Champion, credit analyst at UBS Warburg. ``The people that will be making the decision on Ericsson will be basically the same people who were making the decisions on Lucent last year.''
Warwick-Champion was director of telecommunications credit analysis at S&P before UBS hired him last July. S&P cut Ericsson rival Lucent Technologies Inc.'s credit rating three notches to BB- from BBB- over the course of about six weeks a year ago.
Morgan Stanley and Goldman Sachs Group Inc. are among banks that have agreed to back $2.1 billion of the share sale. The main shareholders, including Investor AB, will guarantee the remainder.
Insurance
Ericsson's 2 billion euros of 6 3/8 percent bonds due in 2006 fell to 68 percent of face value from 76 percent yesterday, according to Salomon Smith Barney prices quoted on Bloomberg.
The cost of insuring against a bankruptcy or default by Ericsson also soared, reaching record levels. The climb indicates investors are increasingly concerned about Ericsson's ability to service and repay debt.
Credit default swaps on the company, which act as insurance in the event of a missed payment or default, cost about 15 percent, up from as low as 9 percent yesterday.
The company is selling new shares to existing investors for 3.80 kronor apiece -- a price last seen a decade ago -- as it seeks to weather a slowdown that Chief Executive Officer Kurt Hellstroem has called the worst in industry history.
Ericsson's finances deteriorated along with those of such rivals as Alcatel SA as phone companies around the world reduced spending, wiping out profits at equipment makers. The company has had its credit rating slashed three times in the past year.
More Cuts?
S&P is considering lowering its BBB- rating on Ericsson's long-term debt and Moody's is reviewing its Ba1 rating for another possible cut.
Madsen disputed a research note by Warwick-Champion that a one-notch downgrade would be enough to release banks from their obligation to underwrite the share sale.
Ericsson will release the full text of the underwriting agreement with banks ``in the next few days,'' Madsen said. The text will be in an attachment to the company's F-3 filing with the U.S. Securities and Exchange Commission.
When announcing the pricing of the shares a week ago, Chairman Michael Treschow said a pledge by banks to buy shares other investors forego wasn't tied to Ericsson's credit rating.
``From Ericsson's point of view, the money is secure,'' he said. Chief Financial Officer Sten Fornell also didn't mention the rating trigger.
The banks are charging a 3 percent fee for managing the share sale, Fornell said last week. That's more than double the typical fee for arranging rights offers, bankers have said.
Ericsson is ``not uneasy'' about the underwriting conditions because it doesn't expect its credit ratings to be slashed far enough to jeopardize the agreement, said Madsen.
The company's stock has plunged 85 percent this year, making it the worst performer on Sweden's 83-member SBX index.