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S&P Cuts Rating for Nortel Networks


On Apr. 9, Standard & Poor's lowered its corporate credit rating on Nortel Networks to BB- on the belief that lack of spending by major customers will impair Nortel's ability to meet its announced revenue guidance for 2002 and into 2003. Standard & Poor's expects that spending in the telecommunication industry will be slower to recover than previously expected and will lag the general recovery in economic performance. Standard & Poor's also forecasts that capital spending by major telecomunication carrier companies will be at a very reduced level, says analysts John Tysall and Bruce Hyman.

The credit ratings continue to reflect Nortel's market position as a leading telecommunications equipment supplier. The ratings also consider the degree of competition in the industry; Nortel's broad geographic coverage and product portfolio diversification; debt levels of around $6.15 billion prior to the bank drawdown; and a strong liquidity position with approximately $3 billion of cash on hand as of Mar. 31.

Nortel had earlier put in place a process whereby unsecured lenders to the company, including bank and public market lenders, are automatically granted security on a parri passu basis in the event of a credit rating downgrade to below investment-grade level. Therefore, all debt of the company is now secured by substantially all of Nortel's assets.

During 2001, Nortel implemented a series of cost-reduction programs, including reducing the labor force by about 50%, reducing capital expenditures by $500 million to $1.3 billion, and saving annualized quarterly expense of almost $5.5 billion by year-end, along with substantial reductions in customer financing. The company also revised its business priorities to exit non-core, low-growth areas and to concentrate on three main high-growth network areas and to focus on its largest carrier and enterprise customers.

The initiatives are designed to ensure that the company is profitable by year-end 2002 at a revenue base well below $4 billion per quarter.

The company announced that revenues for the 2002 first quarter declined 16%, to about $2.9 billion, from the previous-quarter level. The company also announced that it will fully draw down its April 2001 $1.75 billion bank facility and will exercise its option to convert the revolving credit facility into a one-year term loan.

Standard & Poor's believes that the industry decline in telecommunication spending will continue to be both more prolonged and severe than earlier anticipated. In this context, Nortel's revenue growth may be substantially negatively affected during 2002 and into 2003. Should revenue and earnings continue to decline significantly or if liquidity is subsequently weaker than currently anticipated, ratings could be lowered. From Standard & Poor's RatingsDirect


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