Nortel to Raise $1.5B in Bond Offering

In another sign that the capital markets are starting to warm up to the networking sector, Nortel Networks Corp. (NYSE/Toronto: NT) today announced a $1.5 billion bond offering (see Nortel Offering US$1.5B in Notes). The offering is due to close on February 8.

J.P. Morgan & Co. (Nasdaq: JPM) and Salomon Smith Barney are serving as lead managers in the offering of 5-year notes with a 6.2 percent yield. Nortel has an A credit rating from Standard & Poors.

A Nortel spokesperson said the company is raising the money because the corporate bond market has become attractive. The company originally proposed a $1 billion offering but upped it because “there has been a strong interest in the offering,” says David Chamberlin, a Nortel spokesman.

There have been several indications that the markets are becoming more receptive to quality offerings from the optical sector. Last week Ciena Corp. (Nasdaq: CIEN) announced that it would be raising $1 billion in a combined stock and bond offering (see Ciena Tests Capital Markets).

According to the press release, Nortel will use the funds raised from the bond offering for "general corporate purposes." So why is the offering coming now?

Interest rates are coming down, as the Federal Reserve cut rates twice in January (see LR Index Update: Fed's Impact Minimal), and Nortel is trying to capitalize. “Rates for investment-grade bonds are at a 12-month low, so we are trying to take advantage," says Chamberlin.

-- Matt Malina, research associate, Light Reading http://www.lightreading.com

Mary Jander 12/4/2012 | 8:57:22 PM
re: Nortel to Raise $1.5B in Bond Offering What are some of the effects we might expect to see if more bond sales happen in the optical market?
jeeves 12/4/2012 | 8:57:13 PM
re: Nortel to Raise $1.5B in Bond Offering
PART A) What does it mean for NT shareholders ?

The M&M (Miller and Mogdiliani)'s Laws in Corporate Finance (roughly equivalent to Newton's Laws in Physics):

There are two ways to raise capital -

1. Float a secondary offering.

Here the Management indicates the stock is
over-priced than what it believes(usually in a bull market). This move dilutes the existing shareholders.

2. Go for a Debt oferring (like NT)

Here the Management indicates the stock is
relatively under-priced (usually in a bear market). This move results in an immediate
spurt of stock price.

Bottomline - look for a 10% jump in NT stock
look for NT activity in the M&A scene
look for agressive vendor financing

PART B - What does it mean for the bond buyers ?
For the actual bond float itself, the quality depends on the Moody or S&P rating given to NT
possibly something better than BBB..

PART C - What does it mean for the optical Market?
Nothing, this is not new, Juniper did a bond offering in Sept 1999, Cyras did a private placement recently...

L3 and Qwest financed expansions thru giant bonds
(called junk because of high rick involved indicated by low ratings CCC etc)

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