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Optical/IP

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
http://www.lightreading.com
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whose 12/4/2012 | 8:08:39 PM
re: Nortel Bonds: Not Quite Junk The junk I see is the journalism - a person senses just from reading the title of this article the bias this journalist has toward the subject. If you're going to report - report facts, otherwise you're engaging in editorialism.
photonic 12/4/2012 | 8:08:39 PM
re: Nortel Bonds: Not Quite Junk
I so wish you folks will stick to Technology.
I don't necessarily see any bias in the article
but it is the same old tiring commentary on how bad the market is.

Stop trying to be the WSJ.
gardner 12/4/2012 | 8:08:37 PM
re: Nortel Bonds: Not Quite Junk I don't think LR would be as useful if it only covered technology and ignored all the things that influence how technology develops.

I agree. I don't think it is possible to really understand the telecom market without understanding the "big picture" and that includes the business and investment climate around the technology. A lot of engineers (particularly the kind who don't know the difference between "biased reporting" and "bias reporting" ;-) ) don't want to think outside of the narrow bounds of the technology of telecom. Perhaps it makes the narrowly focused among us uncomfortable but I say keep up the good work and present the entire picture! Don't listen to Philistines who want you to limit LR to product specs and undigested press releases from their favorite companies. Keep those sacred cows on the grill where they belong.
gardner 12/4/2012 | 8:08:36 PM
re: Nortel Bonds: Not Quite Junk The junk I see is the journalism - a person senses just from reading the title of this article the bias this journalist has toward the subject. If you're going to report - report facts, otherwise you're engaging in editorialism.

Lighten up and try to develop a sense of humor and a bit of imagination. It's just a cute title for the story. The article is factual. I guess your own bias may be showing here. Did you get caught with a ton of Nortel stock and that makes you touchy? By the way, what you were trying to accuse them of is "biased" reporting not "bias" reporting.
Steve Saunders 12/4/2012 | 8:08:36 PM
re: Nortel Bonds: Not Quite Junk gardner,

Nice to see someone "gets it."

If you only cover technology, and not money, you're only getting 1/2 the story.

Less than half, actually.

Steve
jmd 12/4/2012 | 8:08:35 PM
re: Nortel Bonds: Not Quite Junk Technology is part of a bigger picture that includes business and economics - you cannot ignore these things. I suppose you could but then you'd end up with customers who have lots of gear but don't make any money :-)

However, LR could have done a much better job at explaining how ratings work. People are objecting to the sensational story title. We want to trust LR and sensationalism does not help.
flanker 12/4/2012 | 8:08:35 PM
re: Nortel Bonds: Not Quite Junk "However, LR could have done a much better job at explaining how ratings work."

Thats what these footnotes are for. Credit ratings are historically based on the probability of default. It's very scientific, just like optical network engineering [ahem].

Here are your historic probability of default numbers for Moodys/SP:

AAA - zero (infinitely low)
AA - less than 3 tenths of one percent
A 7 tenths to one tenth of a percent
BBB - 1.3 to 3.5 percent
BB - 1.2 to 1.5 percent
B - 5 to 7 percent
C - 20%

You will note the statistical anomaly that BBB rated bonds historically were less safe than BB rated bonds, even though the rating is higher.

In theory, you are supposed to calculate the risk of default over a single observation period (for one year, say a 1/100 of one percent chance of default) and then compound that number by the number of years of the bond. For example a five year bond would then have a 1.0001^5 chance of default. That risk factor would be plugged into an equation to determine the bond's interest rate, or spread over a risk-free investment like treasuries.

flnkr














whose 12/4/2012 | 8:08:34 PM
re: Nortel Bonds: Not Quite Junk You are correct - it is "biased" not "bias" - my mistake for not paying attention, and I don't mind admitting to it. By the way,I am not an engineer. As the story goes, an optimist thinks the glass is half full, and a pessimist half empty. An engineer, of course, endlessly ponders why the glass is made twice as big as it should be.

As far as your comment, Phil - "I didn't write the headline, but I did write the story" I personally would be ashamed to put my journalist intrigity under a "biased" title like this. But then again, ya gotta do what sells. At least accept responsibility, man.

The bias in Light Reading is the tendency to "root" for the underdog, which I suppose is understandable given that Light Reading is an underdog next to the big media concerns. Just be careful, given the finicking whims of the markets these days, Light Reading status may just become junk someday, too... ;_)

BL2000 12/4/2012 | 8:08:34 PM
re: Nortel Bonds: Not Quite Junk Understanding and keeping up with just the "Tech" will only help you to move light. It will not provided you with the ability to move it for someone. The bottom line is the markets both private, commercial, and exchanges, are what we are here for.

Some folks may be working in this career field out of since of public service, but I am certainly not one of them.

The best technology in the world will never make it to market if it's being developed by an organization that can no longer stand on it's feet. Anybody running to buy service from 360 this week?

whose 12/4/2012 | 8:08:33 PM
re: Nortel Bonds: Not Quite Junk How about this for a title "Moody's downgrades Nortel's bond ratings." I guess it wouldn't compete against the National Enquirer...
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