Nortel downgraded by Moody’s

Citing the dramatic slowdown in the telecommunications equipment market, Nortel Networks’ long-term securities have been downgraded by Moody’s Investors Services.

The company’s senior unsecured debt rating was moved from A3 to a Baa1--just three notches above “junk” levels. Moody’s defines the grade as “medium-grade obligations…Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well.”

Moody’s also downgraded Nortel’s preferred stock from Baa2 to Baa3, meaning it is now considered on the lower end of the rating category, just one notch above “junk” status.

According to Moody’s, the uncertainty in future demand for communications equipment brings Nortel’s earnings potential into question, giving the company a negative outlook.

“While the progress to date in cost reduction has been impressive, there remains significant uncertainty as to the outlook for demand from the telecom service providers. The changing competitive dynamics, excess network capacity and efforts to improve network utilization efficiency are likely to depress demand and place pricing pressure on many of Nortel’s products. Therefore, there remains a risk that the downturn will be more protracted and the return to profitable operations further delayed,” said the Moody’s press release.

In addition, said Bob Ray, senior vice president of corporate finance for Moody’s, Nortel has posted a loss for the past two quarters, affecting the company’s balance sheet.

“The fact that their debt load has been increasing and leverage has been going up is one of the reasons for the change,” he said.

A $2 billion credit facility, though should give the company, “more than adequate liquidity” going forward Ray said.

This is the second downgrade Nortel has received in two months. In July, Nortel’s senior long-term debt was cut from A2 to A3.