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Nortel Bonds: Not Quite Junk

Moody's lowers its bond ratings on Nortel; says Nortel may see further downgrades UPDATED: 07/03, 6:00 PM

July 3, 2001

2 Min Read
Nortel Bonds: Not Quite Junk

Moody's Investors Service, a major Wall Street credit rating firm, lowered its ratings for Nortel Networks Corp. (NYSE/Toronto: NT) on Tuesday and hinted that it might lower ratings again within a month (see Moody's Lowers Nortel Rating).

After Nortel's June 15 regress report, where the company said it is expecting quarterly net losses of $19.2 billion and is cutting an additional 10,000 jobs, Moody's determined that Nortel's current credit rating would "not be sustainable," according to Robert Ray, a senior vice president at Moody's (see Nortel's Nuclear Winter).

The agency cut Nortel's rating for senior unsecured debt to A3 from A2. It cut Nortel's preferred stock rating to baa1 from a3; and it lowered the rating for Nortel's commercial paper -- short-term unsecured corporate debt -- to Prime-2 from Prime-1.

The commercial paper downgrade is significant, because as the economy becomes more tumultuous, investors look more to issuers that have a superior ability to repay debt. "Investors have shied away from the Prime-2 market recently, and there's a lot less money invested there," says Ray. "That's not to say that a company the size of Nortel can't issue commercial paper, but it'll probably be more expensive [to do so]."

Tuesday's ratings cuts might be just the beginning. Moody's added that Nortel's long-term ratings remain on review for possible further downgrade. Moody's expects to know the extent of Nortel's credit rating changes in the next month or so, Ray says.

The takeaway from this announcement is that, in general, Wall Street is losing confidence in Nortel's ability to repay debt, given the turmoil the company's in right now. This may mean that borrowing money will be more expensive for Nortel going forward.

Nortel says the rating cut was "not unexpected."

"This will not have a significant impact on our business," says Tina Warren, a Nortel spokeswoman. "We are making continuing progress with our alignment plan, and we are confident that our ratings will remain solidly within investment grade."

Despite its problems, though, Nortel certainly isn't on the same level as Lucent Technologies Inc. (NYSE: LU), whose credit rating slipped to "junk" status. And it hasn't had to file for bankruptcy protection, like bond issuers such as WinStar Communications Inc. and 360networks Inc. (Nasdaq: TSIX; Toronto: TSX.TO).

- Phil Harvey, Senior Editor, Light Reading

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