Nortel Credit Gamble Pays Off

Nortel Networks Corp. (NYSE/Toronto: NT) finally issued something that might pass for good news in today's environment, after playing a game of chicken with its bankers yesterday (see Nortel Issues Damage Report). This morning's announcement that the bankers are willing to revise their credit terms brought sighs of relief from investors (see Nortel Amends Credit Facility).

But the company's lost a bit of credit in the process (literally) and is likely to need further expense cuts regardless, sources say.

Here's the deal: All 27 members of Nortel's "international bank syndicate" have agreed to extend the company's credit, following Nortel's notice yesterday that it would draw down the full amount of its US$1.75 billion credit facility rather than risk having no credit in the future.

Three of the bankers had been holding out on Nortel, which indicates unanimous support among the syndicate is needed to change the terms.

"Nortel basically said, 'Fine, if you're not willing to extend our credit, we'll draw down the whole damn thing at once,' " says Duncan Stewart, portfolio manager at Tera Capital Corp. The move worked well, he says. "The interest rate is now a bit higher, which is good for the banks, and Nortel doesn't have to carry all that cash, which would have been silly."

In return for getting the term of its facility extended another year, Nortel has taken a reduction in the full amount of the facility. It's now $1.175 billion, not $1.75 billion. Nortel must still maintain the same prerequisite financial conditions that applied to the old credit facility -- and it must now paying a higher interest rate on anything it borrows.

Nortel reiterated that it plans to post a $3.0 billion cash balance when it reports earnings April 18. This figure includes significant tax rebates from the U.S. government as a result of President Bush's tax legislation signed into law March 9. Nortel has received $500 million in rebates for the first quarter and plans to get $700 million more next quarter.

The tax change has also been cited by analysts as a possible boon to other companies, specifically Lucent Technologies Inc. (NYSE: LU), which also has predicted a tax windfall (see Lucent Weighs on the World).

Stewart says Nortel's cash position, plus the relatively slight drop in earnings from its previous guidance, helped keep the stock afloat after yesterday's announcement. "We saw yesterday that cash was better than many had anticipated and revenue was maybe a bit lower but not that much."

It's also a source of relief to investors, he says, that Nortel won't have to dilute its stock by issuing an offering of convertible debt or equity. "That's the single happiest thing."

But Nortel's not out of the woods by any means. Stewart is among those who say the company will need to continue cost cutting in order to reach cashflow positive. He feels the company may need to cut another 2,500 or 3,000 jobs to reach the necessary expense level.

— Mary Jander, Senior Editor, Light Reading
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