DBRS Changes the Trend on Nortel Networks to Stable from Positive
DBRS has today changed the trend for the B (low) Issuer Rating and Pfd-5 (low) preferred share ratings of Nortel Networks Limited, Nortel Networks Corporation, and Nortel Networks Capital Corporation (collectively, Nortel or the Company), to Stable from Positive.
The rating action follows Nortel’s announcement today that: (1) a sustained and expanding economic downturn will pressure the Company’s operating and financial performance, (2) the Company will undergo further restructuring and cost reduction initiatives, and (3) the Company intends to explore a divestiture of its Metro Ethernet Networks (MEN) business.
DBRS had placed Nortel on Positive trend in July 2008. At the time, DBRS expected the Company could reasonably grow revenue in the low single-digit range, achieve gross margins comfortably above 40%, and grow and sustain operating margins above 8% (see separate press release dated July 14, 2008). DBRS had expected Nortel’s Enterprise Solutions and MEN businesses to be the primary drivers of expected operating improvement.
In light of Nortel’s revised business outlook, DBRS expects that the time horizon in which the Company can comfortably achieve these operating metrics has extended beyond what may be reasonable for the trend to remain Positive. Despite expected improvements in the gross margins (which are expected to remain above 40% at the end of the year), DBRS now anticipates that revenue growth and operating margin improvements will fall well short of previous expectations.
For the full year of 2008, DBRS now expects Nortel’s revenue to decline by just under 4% on a year-over-year basis, to roughly $10.6 billion, and operating margins are expected to remain well below 8% at the end of the year. DBRS expects Nortel’s liquidity to deteriorate slightly from historic levels, with the Company’s overall cash position declining to roughly $2.7 billion at the end of 2008.
With respect to its MEN business, while the impact of a divestiture on the Company’s consolidated financial and business risk profiles may be moderate, DBRS notes that exiting this business will remove the Company from a higher-growth segment, expected to be a partial driver of the Company’s overall operating improvement.
DBRS expects the long-term trend to remain Stable until DBRS can gain comfort on: (1) the relative mix in terms of the competitive and economic forces affecting the Company’s ability to achieve its long-term financial targets, (2) the impact on the Company’s financial and business risk profiles following any divestiture of the Company’s MEN business, and (3) Nortel’s long-term strategy to achieve meaningful and sustainable operating improvements in an intensely competitive and challenging operating environment.
Note:
All figures are in U.S. dollars unless otherwise noted.
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Ratings
| Issuer | Debt Rated | Rating Action | Rating | Trend | Recovery Rating | Notes | Published |
|---|---|---|---|---|---|---|---|
| Nortel Networks Limited | Issuer Rating | Trend Change | B (low) | Stb | -- | Sep 17, 2008 | |
| Nortel Networks Capital Corporation | Senior Unsecured Notes | Trend Change | B (low) | Stb | RR4 | Sep 17, 2008 | |
| Nortel Networks Corporation | Convertible Notes | Trend Change | B (low) | Stb | RR4 | Sep 17, 2008 | |
| Nortel Networks Limited | Notes & Long-Term Senior Debt | Trend Change | B (low) | Stb | RR4 | Sep 17, 2008 | |
| Nortel Networks Limited | Class A, Redeemable Preferred Shares | Trend Change | Pfd-5 (low) | Stb | RR6 | Sep 17, 2008 | |
| Nortel Networks Limited | Class A, Non-Cumulative Redeemable Preferred Shares | Trend Change | Pfd-5 (low) | Stb | RR6 | Sep 17, 2008 |