S&P Global Ratings has upgraded its outlook on Coherent Corp. from “negative” to “stable,” reflecting growing confidence in the company’s financial health. The rating agency also reaffirmed Coherent’s credit rating at ‘BB-’, which, while still below investment grade, shows steady improvement in the company’s performance.
This revision comes as Coherent benefits from rising demand for its datacom transceivers, small but vital components that help AI servers communicate and process massive amounts of data. These parts are in especially high demand as big tech companies (often called “hyperscalers”) continue to invest heavily in artificial intelligence infrastructure. This uptick in sales has more than made up for weaker performance in Coherent’s telecom and industrial divisions.
As a result, the company’s revenue jumped by more than 20% year-over-year in the third quarter of its 2025 fiscal year, which ended in June. Coherent has also been working hard to clean up its balance sheet. Over the past three quarters, it has paid off more than $200 million in debt, while improving its profit margins through cost-cutting and better efficiency.
Thanks to these efforts, S&P expects Coherent’s leverage ratio (how much debt it has relative to earnings) to drop to the “high-4x” range by the end of fiscal 2025. That ratio is expected to fall even further, to the “low-4x” range, by fiscal 2026, helped by additional revenue growth and margin improvements.
Looking ahead, S&P predicts that Coherent’s revenue will grow between 5% and 8% in fiscal 2026. The company is expected to continue expanding its margins by reducing costs, restructuring some operations, and shutting down unprofitable parts of the business, like a portion of its silicon carbide division that wasn’t generating revenue.
It’s worth noting that roughly 2 times Coherent’s leverage ratio is due to a $2.15 billion preferred equity investment from Bain Capital. S&P counts this as debt because Bain has the right to demand repayment in 2031.
To navigate U.S.-China trade tensions, Coherent has moved most of its datacom manufacturing from China to Malaysia, helping protect against future tariffs. The company is also tightening its belt by raising some product prices, cutting staff, and reducing expenses.
S&P expects Coherent to generate over $200 million in free cash flow in fiscal 2025 and more than $400 million in 2026. These funds can be used to continue paying down debt, further strengthening the company’s financial position.
The stable outlook means that S&P believes Coherent will keep its debt levels manageable, below 5 times earnings, and continue generating strong cash flow even in the face of economic challenges or trade policy changes.