Restructuring charges evidently mean different things to different people. Equity analysts view these charges as one-time events that should be disengaged from earnings to create a picture of how a company's ongoing operations are performing. Credit analysts and lenders have a different perspective. Focused on cash flow, lenders, for example, scrutinize rather than isolate charges to ferret out cash portions that choke cash flow.
Witness the practical consequences of such scrutiny in the extreme example of Lucent Technologies. In late July, CEO Henry Schacht unveiled an ambitious new plan aimed at reducing annual operating expenses by $2 billion and boosting working capital by $1 billion. But bankers placed caps on restructuring charges written into a February credit facility, essentially tying the CEO's hands.
"The notion of putting a limit on the restructuring charge is unusual," says Bob Konefal, managing director of the telecom practice for Moody's Investors Service. "But it wasn't unexpected."
In negotiating the limit, the banks looked at the implications for cash flow of what was included in the charge. According to Lucent, financial covenants included bank limits on the firm's overambitious vendor financing portfolio as well as hefty severance payouts and lease payoffs resulting from facility closings.
Equity analysts generally don't focus on such charges, because they're not indicative of a company's fundamental operating performance. Yet banks are tightening loan covenants for many troubled firms, so more of these supposed one-time events may bear closer scrutiny. Loan Pricing Corp., which tracks trends in loan covenants, reports that the debt-to-EBITDA ratio is 3.2x for the first half of 2001, compared with 3.5x for 2000. Lucent won more wiggle room in August, when bankers agreed to loosen the $4 billion cap they had imposed on its restructuring charges. But while that cleared the way for Lucent to write off an additional $9.7 billion, the firm has been delayed in spinning off Agere, its optical components subsidiary, until it meets other restrictions. -- A.N.
LET'S MAKE A DEAL
To spin off Agere, bankers are requiring Lucent to:
- achieve positive EBITDA for fiscal quarter prior to spin
- raise $5 billion in cash, doubling the original goal
- discontinue payment of cash dividends on common stock
Source: Lucent Technologies