Shares of Ciena Corp., the Linthicum maker of fiber-optic equipment, slid 7 percent by the end of trading yesterday after Moody's Investor Service Inc. said it was reviewing the company's debt for a possible downgrade.
Moody's said in a statement that the review is in response to uncertainty in the telecommunications market along with a fall in demand for Ciena's products.
"The review is prompted by the collapse in demand for Ciena's next-generation optical networking products, having led to an operating loss in FY 2002 Q1 and further loss expected in FY 2002 Q2, combined with the overall uncertainty that has engulfed the market for telecommunications equipment and the company's prospects for profit recovery," Moody's said.
Howard Sitzer, a vice president and senior analyst at Moody's, said the review should not come as a surprise. "There are questions affecting the entire telecommunications equipment market with regard to cutbacks in capital spending by the service providers," he said.
Jay Ritter, a stock analyst who covers Ciena for Morningstar Inc. of Chicago, said a downgrade would mean it would cost Ciena more to raise money in the future.
"If they need to raise more money, then they're going to have to pay more for their next deal," he said.
Moody's said it would review the Ba3 rating on Ciena's $690 million convertible senior notes that are due in 2008, Ba3 senior implied rating and Ba3 senior unsecured issuer rating.
The review will take into account Ciena's restructuring plans under which the company said it would take more than $300 million in charges during the second quarter of 2002.
Moody's will also look at Ciena's proposed merger with ONI Systems Corp., a California fiber-optics company that Ciena plans to buy for $1.2 billion in stock and debt. That deal is expected to close in the second or third quarter.
Shares of Ciena closed at $8.03, down 61 cents and near its 52-week low. The stock traded as high as $70.89 last spring.
Simon Leopold, a telecommunications analyst and vice president for Merrill Lynch in New York, said announcements like the Moody's review typically push a stock downward during the day -- in Ciena's case, as much as 9 percent. The closing price is usually the best indicator of how investors feel.
He also said that rating agencies may see information that investors and analysts are not permitted to see, "so anytime you see anybody get put on credit watch, you have to be careful because you don't know what you don't know."