DBRS Comments on Nortel Networks Corporation Accounting Restatement
DBRS notes that today’s announcement by Nortel Networks Corporation (Nortel or the Company) relating to further accounting restatements will not have an immediate impact on Nortel’s B (low) long-term ratings.
DBRS recognizes the size of the accounting restatements are not material and are all non-cash in nature. In addition, the Company expects to have its 2006 10K filed by the required March 16, 2007 deadline. However, DBRS has become more concerned regarding Nortel’s financial reporting mechanisms (two restatements occurring at the end of the last two fiscal year ends). Although the Company has publicly indicated that the probability of further accounting restatements have likely become “slimmer,” the probability of last minute restatement could still exist until the substantial implementation of its new financial control reporting system (SAP) which is not expected to occur until the second half of 2007.
DBRS acknowledges that management has made progress on the previously identified five major internal control weaknesses outlined in its 2005 10K filing. However, it is still somewhat disconcerting that internal control breaches, even minor ones, have led to increased uncertainty about financial reporting.
DBRS will now more closely monitor the change in auditors at Nortel as well as the departure of the current CFO, both of which are occurring during what now appears to be a time of somewhat heightened uncertainty, especially relating to confidence in accurate and timely financial reporting from Nortel. If the filing of accurate financial statements, along with a clear succession path of the Company’s financial unit is not properly addressed in the near-term, DBRS reserves the right to take negative rating action based solely on these issues, regardless of the financial performance of the Company.
DBRS notes that based on current unaudited figures, Nortel’s business performance appears acceptable for its current ratings, which is also supported by the Company facing no substantial near-term maturities, a substantial cash balance estimated by management at $3.5 billion, along with the expectation of continued support from Export Development Canada though its $750 million support facility. DBRS estimates that Nortel has approximately $4.5 billion in gross debt outstanding.
Notwithstanding, DBRS believes that Nortel needs to put its internal control issues behind it as the communication equipment vendor market continues to undergo a structural shift as a result of competitors merging to create greater economies of scale, while new entrants from emerging markets continue to price aggressively, taking market share away from more established vendors such as Nortel.
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All figures are in U.S. dollars unless otherwise noted.
DBRS's rating definitions and the terms of use of such ratings are available at www.dbrs.com.