Nortel Feathers Its Nest

Nortel Networks Corp. (NYSE/Toronto: NT) added cash to its coffers yesterday through a debt offering to institutional investors that brought in $1.5 billion. The company raised the size of its offering from $1 billion as a result of high demand from institutional investors (see Nortel Offering Notes).

While the company’s stock was trading down 0.27 (3.57%) to 7.29 in midday trading, analysts still say the deal is a positive one for Nortel. The company was able to negotiate favorable terms for itself with a dividend of 4.25 percent and a conversion rate of 32.3 percent. Based on yesterday’s closing price of $7.56, this gives investors the option to convert their bonds into shares of the company when the stock trades at or above $10 a share.

Compare this to a similar deal that Lucent Technologies Inc. (NYSE: LU) struck last week (see Lucent Boosted by Bond Offering). Lucent, which had its bonds reduced to “junk” status, will have to pay creditors an 8 percent dividend on the $1.9 billion it raised, and its conversion premium was only 22 percent above a closing price of $6.13.

“Lucent was desperate for cash,” says one analyst who didn’t want his name used. “Nortel is just being opportunistic. This is an extra cushion for them.”

Unlike Lucent, which was forced to take on new debt for cash, Nortel is currently in a much better position. The company already has about $1.9 billion in cash or cash equivalents. And with other debt facilities factored into the mix, it has a total of about $4.9 billion, according to a research note published by Tim Luke of Lehman Brothers in July, after Nortel’s second quarter earnings were announced (see Has Nortel Hit Bottom?). This new debt offering will raise the company’s access to capital to about $6.5 billion.

According to Luke, Nortel only needs about $1.3 billion in cash before it returns to cash-flow positive in the third quarter of 2002. In his note, Luke said he was encouraged by the progress Nortel had made in strengthening its balance sheet by improving cash flow and working capital. He particularly noted Nortel’s reduced burn rate. On June 15th when the company pre-announced its earnings, management told investors that the company expected to burn through $2 billion in cash in the second quarter, but by July 20th, it reported only using $500 million.

“We believe this progress may potentially help Nortel differentiate itself in the eyes of investors from the challenges facing Lucent,” wrote Luke in his note. “After NT fell so hard this quarter (with areas such as long haul optical going from over $2.1 billion in December to $293 million in June), we believe the operating results should begin to see some slightly improving trends in 4Q01.”

Bond holders are already reaping rewards, as the convertible debt trades 2 percent above its offering yesterday. “This is a pretty reasonable increase,” says one bond trader, “especially since the company’s stock is sucking wind.”

- Marguerite Reardon, Senior Editor, Light Reading

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