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Moody's Junks Nortel Debt

Another one hits the junk pile.

A little less than a year after Lucent Technologies Inc.'s (NYSE: LU) debt was downgraded to junk status, Nortel Networks Corp. (NYSE/Toronto: NT) has achieved the same dubious distinction.

Moody's Investors Service today lowered Nortel's senior long term debt to Ba3 from Baa3, the rating on the company's preferred stock to B3 from Ba2, and the company's rating for commercial paper to Not Prime from Prime-3 (see Nortel Responds to Moody's). A Ba3 debt rating is considered junk-bond status.

Moody's blames the decline in capital spending among incumbent carriers for Nortel's weak financial performance. Moody's believes that further declines are possible as carriers increasingly focus on their own liquidity and capacity requirements.

"Nortel has done an awful lot to improve their situation," says Robert Ray, senior vice president at Moody's. "But the end market they are looking at appears to be under significant pressures, and it likely won't rebound anytime soon. Nothing specific prompted this action. We've gotten a sense that incumbent carrier spending, in North America especially, has been pared back."

Consequently, Moody's believes that spending will continue to be depressed for wireline networks and could be made worse for Nortel and other equipment providers as surviving carriers scarf up assets from those that have failed. Wireless provides some hope, but 3G networks will be slow to take hold, keeping growth in this market to a minimum.

Despite the downgrade, the firm seems positive about Nortel's long-term prospects, saying the company is well positioned with leading market share in many of its products. Additionally, the company has aggressively reduced its cost base, by an estimated $6 billion per year, and has been successful in managing its working capital, which has substantially offset the operating losses. This has helped the company cut back on its debt without having to rely on asset sales to do so.

Some bond traders say they were already expecting the downgrade. "In reality, Nortel hasn't been investment grade since at least its last earnings call," says one bond trader who didn't want to be named. "It was a foregone conculsion that the bonds would be downgraded. People were already hesitant to lend to them."

So what exactly does this all mean for Nortel? Nortel says that it will continue to be business as usual.

"We do not expect the ratings downgrade to have a significant impact on our day-to-day business operations," said CEO Frank Dunn in a prepared statement. "We see the downgrade as being primarily driven by industry conditions affecting the telecom sector following the events of 2001."

But going from investment grade to junk status will most likely affect Nortel's ability to raise new capital. Lenders are much less likely to buy bonds that are below investment grade. And even if Nortel is able to sell its bonds, it will likely pay a higher percentage on that debt than if its debt were rated investment grade. As a result, the company may be forced to rely more heavily on its cash reserves to fund its operations.

Unlike many carriers -- like McLeodUSA Inc. (Nasdaq: MCLD) and XO Communications Inc. (OTC: XOXO), which have recently seen their debt ratings fall below investment grade -- Nortel has enough cash and liquidity to keep it out of insolvency, at least for the short term (see McLeodUSA on the Brink and Carrier Bankruptcies in Full Bloom). The company is sitting on $3.5 billion in cash. Clearly, this year will be a challenge for Nortel as it will be forced to dig into that cash reserve, but it still buys the company quite a bit of time.

"They are burning through a lot of cash," says the unnamed bond trader. "But it's highly unlikely they'd go through $3.5 billion in just one year. Maybe in 12 months things will look different."

The market reacted modestly to the downgrade. At midday the stock was trading down $0.08 (1.84%) to $4.27. Part of this can be explained by the fact that many mutual funds are not allowed to hold stocks that are below investment grade.

Nortel's key rival Lucent was downgraded to junk status in June of last year and still hasn't had its debt upgraded to investment status since then. Nortel will report its next quarterly earnings on April 18th.

- Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com
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jssreenath 12/4/2012 | 10:39:53 PM
re: Moody's Junks Nortel Debt Does Moody own a sizeable portion of a Nortel competitor?
optical_man 12/4/2012 | 10:39:53 PM
re: Moody's Junks Nortel Debt "Author: oce_sd Number: 1
Subject: Moody?? Date: 4/4/2002 7:29:59 PM
Does Moody own a sizeable portion of a Nortel competitor?"

Oh, yeah, that's exactly it you brainwashed freak. Whenever someone external says something bad about NT they are a competitor or are a 'paid basher' (that's an easy money job I'll take, too bad they don't exist).
Moody's doesn't care about any one company in any one industry (they cover ALL industries), they just "Calls it like they see it".

OpticalBomb 12/4/2012 | 10:39:50 PM
re: Moody's Junks Nortel Debt optical_guy, you are an adolescent calling people a "brainwashed freak" from the anonymous comfort of your keyboard. Let me guess, you are an analyst?
toohideous 12/4/2012 | 10:39:50 PM
re: Moody's Junks Nortel Debt As I recall these guys, and others in there line or work, had good ratings for enron right up until they filed for bankruptcy. They even had to testify before congress as to why that was.

So, for me it will be a while before what they say has much meaning....
jssreenath 12/4/2012 | 10:39:32 PM
re: Moody's Junks Nortel Debt Brainwashed freak? I think its more like "justifiable critic" I dont have any affiliation with NT, I am just a little skeptical of Moody's motives because they seem to be relentlessly bashing a company that we all know is hurting. I guess I would like the analysts to tell me something that I dont already know. I say that:
1. You are a sensative analyst that has been egregiously incorrect in the past year and is lashing out at anyone that questions the validity of these rediculously over priced and innaccurate priced reports.
2. Moody has a giant stake in another equipment provider that is probably actively competing for a contract with one of the major carriers.
Now that makes a lot more sense than calling me a "brainwashed freak" doesn't it?
knave 12/4/2012 | 10:39:32 PM
re: Moody's Junks Nortel Debt
I always thought "junk" was a very appropriate classification for Nordl. Hopefully they LU and the other dinosaurs will depart so we can build a real network ...
skeptic 12/4/2012 | 10:39:31 PM
re: Moody's Junks Nortel Debt Brainwashed freak? I think its more like "justifiable critic" I dont have any affiliation with NT, I am just a little skeptical of Moody's motives because they seem to be relentlessly bashing a company that we all know is hurting.
--------------
The only real question is what Moody's waited
so long to do it. They should have done it
lots sooner. Regardless of Moody's actions,
I think the market perceived nortel at junk bond
status a long time ago.

Hurting companies get their debt downgraded.
Thats how it is supposed to work.
layer3 12/4/2012 | 10:39:26 PM
re: Moody's Junks Nortel Debt oce_sd

I sincerely hope you know more about technology than you do about investment banking.

Moody's Investors Service rates the quality of debts- this rating is used by the banking industry to set appropriate yields. Moody's rating of Nortel's debt to junk status will hamper Nortel's ability to raise more debt, if needed in the future. If they can raise more money via a debt issuance, Nortel will have to pay higher rates. Sometimes, a lowering of a debt rating will trigger automatic repayment on other debts held, possibly causing a cash crunch- not unlike what we've seen at many service providers hiding under the protection of chapter 11.

In plain English, Nortel has to raise revenues, raise margins,lower costs(more layoffs..)- and hope it won't need more cash- if it wants to survive the bubble bursting.

L3

Metadata123 12/4/2012 | 10:39:21 PM
re: Moody's Junks Nortel Debt The losses that NT has been racking up are phenomenal. It is quite appropriate to question the viability of Nortel and Lucent as companies. By laying off another 10,000, Nortel would have a staff of 35,000, which is still probably too large for a telecom company with limited revenue potential and hardly any products for the future.

One thing that could help Nortel is to shed its Canadian heritage and establish itself as an American company. The bureaucratic Canadian mindset has not helped the company any in its struggles. Unfortunately, too many of the senior roles in the company are still held by Canadians who migrated south. Replacing them would be a step in the right direction. So force all Canadian vice presidents to tend their resignations right away. These guys have wrought much harm.

Another idea is to stop financing its customers. The recent $270M wireless win with Telefonica Moviles was financed to the tune of $250M by Nortel. Talk about the broke lending to the stupid.

Another is to cut costs. We still see Nortel ads in hockey games and such. This is a shame. Nobody watching could care if Nortel was a stuffed penguin or a cow. So get the ugly logo out of our faces. Also stop paying ex VPs their one year of severance pay. This is scandalous.

I suggest all Nortel employees fall to their knees and pray hard to their gods. All earthly bets are off.
joe_average 12/4/2012 | 10:39:16 PM
re: Moody's Junks Nortel Debt Metadata123 wrote: >>The bureaucratic Canadian mindset has not helped the company any in its struggles. Unfortunately, too many of the senior roles in the company are still held by Canadians who migrated south. Replacing them would be a step in the right direction. So force all Canadian vice presidents to tend their resignations right away.<<

It certainly does seem easy to point fingers based on nationality. Do you ever ask yourself if you are bigotted? Try replacing "Jews", "Blacks", "Chinese" for "Canadians" and see how your comments look.

I'm personally offended by your remarks and somewhat surprised as the majority of your posts are usually interesting and thought out.

How about a nice apology?
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