DBRS New Issue - Nortel Networks Limited
Dominion Bond Rating Service (“DBRS”) has assigned a rating of B (low) with a Stable trend to the three new senior unsecured notes from Nortel Networks Limited (“NNL”), which are guaranteed by Nortel Networks Corporation (“NNC”) and Nortel Networks Inc. (“NNI” or collectively, “Nortel” or the “Company). The three new issues from NNL are expected to total approximately US$2 billion, consisting of:
(1) Floating senior unsecured notes maturing in 2011;
(2) Fixed rate senior unsecured notes maturing in 2013; and
(3) Fixed rate senior unsecured notes maturing in 2016.
DBRS notes that proceeds from debt issues will be used to repay the US$1.3 billion loan facility that was implemented at NNI in February 2006 and to replenish cash balances used for the repayment of the US$150 million of unsecured notes maturing at Nortel Networks Capital Corporation (also collectively "Nortel") in June 2006 and after the Company placed US$575 million in escrow on June 1, 2006, related to the proposed shareholder lawsuit settlement announced on February 8, 2006.
Upon successful completion of the debt issuance, it is DBRS’s expectation that Nortel will have a 100% unsecured debt structure and therefore DBRS would then discontinue its ratings on NNI’s Senior Secured Bank Debt, NNL’s Secured Senior Notes, as well as NNI’s Senior Unsecured Bank Debt. Despite the removal of the secured debt from its capital structure, DBRS will maintain the unsecured ratings of Nortel at B (low), reflecting heightened concerns about Nortel’s ability to improve its operating performance despite the Company implementing a strategy to improve its competitive position over the medium term. DBRS’s concerns are predominantly attributable to revenue and margin pressures resulting from customer consolidation and the increasing presence of emerging market vendors in both the wireline and wireless segments, both of which negatively impacted Q1 2006 results.
However, DBRS does acknowledge that this debt issuance extends the Company’s debt maturity profile, with the nearest debt maturity being US$1.8 billion in 2008. In addition, Nortel will maintain a cash balance of approximately US$2.7 billion pro forma the debt issuance, which provides the Company with a significant cushion to absorb contingencies, such as potential cash settlements relating to the U.S. Securities and Exchange Commission and Ontario Securities Commission investigations.
DBRS's rating definitions and the terms of use of such ratings are available at www.dbrs.com.