DBRS Downgrades Nortel to CCC, Negative Trend

DBRS has today downgraded the ratings of Nortel Networks Corporation, Nortel Networks Limited and Nortel Networks Capital Corporation (collectively, Nortel or the Company) to CCC from B (low). The trends are Negative. Nortel Networks Limited’s preferred shares were downgraded to D (default) on December 11, 2008, due to the suspension of the preferred dividends. Today’s rating action removes the Company from Under Review with Negative Implications, where it was place on November 10, 2008.

The downgrade follows DBRS’s review of Nortel’s performance year-to-date, which has been below expectations, and our outlook for a difficult year in 2009 and beyond. We are primarily concerned with the growing business risks the Company faces in light of an operating environment that continues to weaken as a result of sinking macroeconomic factors, the negative impact on capital spending and increasing competitive forces that are impacting the demand for its products and services. All this could have a direct impact on the Company’s liquidity over the near term.

Specifically, we are concerned that (i) Nortel’s revenues could decline through reduced demand or the sale of product lines, (ii) its restructuring programs may not provide sufficient cost savings, (iii) working capital needs could escalate and (iv) pension plan contributions could grow. If any of these issues grow during 2009, the Company could see negative free cash flow that would start to burn through cash-on-hand. Assuming there is only about $1 billion of the $2.4 billion of the cash-on-hand (expected at year end) to support a shortfall, the Company’s liquidity could come under pressure next year, unless alternative plans are put in place.

The first alternative is to sell some of its operations, such as the Metro Ethernet Networks (MEN) business, and use the proceeds to shore up its liquidity. However, this plan is problematic in that is removes earnings and removes some of its growth prospects. In the end, we view this as a temporary solution. Unless the Company can maintain revenues in excess of $10 billion, year-over year, with gross margins steadily above 40%, it will likely need to make material changes to the size of the operations and the research and development activities. If this is the case, the alternative plan to sell assets could also be coupled with some type of M&A activity or a joint venture.

This action reflects DBRS’s view that time is of the essence for the Company to put forth a plan for the long term, not just the short term. Either way, the Company should decide on a course of action in the first quarter on 2009, as there may be fewer options as the year progresses.


Note:
All figures are in U.S. dollars unless otherwise noted.

DBRS’s ratings on technology companies are primarily based on factors such as the product suite, the base of customers, the competitive landscape, research and development initiatives, gross operating margins and the financial profile.

This is a Corporate rating.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

Ratings

Back to top