Moody’s downgrades Nortel debt to near junk

The Moody’s Investors Service has lowered its ratings on long-term securities issued by Nortel Networks and its guaranteed affiliates from Baa2 to Baa3—one notch above junk status.

Moody’s also lowered the rating for the company’s commercial paper, to Prime3 from Prime2. Moody’s said these ratings would “remain on review” for possible further downgrade.

Motivating the action was “weakness in key end markets that is likely to be deeper and more protracted than previously anticipated.” Specifically, Moody’s is concerned that incumbent carriers have “materially cut back their spending plans” as they focus more on liquidity. Stable capital spending by the incumbents is seen as a must, because spending by emerging carriers has decreased sharply.

Moody’s also said pricing pressures on equipment vendors would likely increase given their focus on the incumbent sector. Accordingly, Moody’s said recovery in the telecom equipment sector is “likely to be deferred further.”

However, Moody’s acknowledged that Nortel has a “solid liquidity position,” with $3.5 billion in cash at the end of 2001. The review of the company’s debt ratings will center on the outlook for telecom equipment demand, Nortel’s ability to “effect necessary cost reduction initiatives” and the expectation for cash generation and usage during the balance of 2002.

Nortel appeared buoyed that Moody’s stopped short of lowering its ratings to junk.

“There is intense scrutiny on the entire sector by the rating agencies. Nortel Networks ratings for long-term debt continues to be within the investment-grade category,” said a Nortel spokesman in a statement. “This ratings downgrade will have no impact on the ability of Nortel Networks to access our bank facilities and is not expected to have a significant impact on our business at this time.”

--Glenn Bischoff, senior news writer