Nortel: bond rating downgrade no surprise

With its credit rating downgraded yesterday to junk bond status by Moody’s Investors Service, officials at networking vendor Nortel Networks Ltd. say operations will continue unabated, despite the disappointing bond action.

In an announcement after the Moody’s move, Nortel president and CEO Frank Dunn said he does “not expect the ratings downgrade to have a significant impact on our day-to-day business operations.”

“We see the downgrade as being primarily driven by industry conditions affecting the telecom sector following the events of 2001,” he said. The company’s plans since last year have taken into account the possibility of credit rating downgrades and were adjusted to prepare for it, he said. “It is business as usual.”

Moody’s announced its lowered ratings yesterday for approximately US$5 billion in long-term securities held by the Brampton, Ont.-based company. Nortel will announce its first quarter financial results for 2002 on April 18.

In its statement, Moody’s said the downgrades “reflect the continued decline in spending by telecom carriers, which is expected to be deeper and more protracted than previously anticipated.”

“The timing of the rating change is not focused on anticipated results for the first quarter but rather our expectation that Nortel’s operating performance will remain under pressure for an extended period and that it will prove difficult for the company to return to profitability this year,” Moody’s said.

Analysts said the downgrades are an unfortunate, but not unexpected result, of the tough telecommunications market.

John Mazur, an analyst at Gartner Inc. in Stamford, Conn., said Nortel is being hurt in large part because of the many bankruptcies of major telecommunications companies that were buying and using Nortel hardware.

“We’re seeing a strange phenomenon right now, ” he said. “Some almost-new used equipment is coming on the market” from the failed companies, hurting Nortel’s sales because of the glut of barely-used, up-to-date hardware that’s being sold at 10 cents on the dollar, Mazur said. “We think it’s a temporary thing.”

“The short term’s pretty grim for them” over the next year, he said. But the company is expected to make sales gains again once the economy improves.

Jeff Kagan, an independent telecommunications industry analyst in Atlanta, agreed. While Nortel’s condition today is far from optimal, the company is in a secure position overall with good research and development, well-placed patents and the ability to come back strong when companies start opening their IT budgets in the future.

“The problem with [Nortel] is not [Nortel], it’s that their customers aren’t ordering,” Kagan said. “It’s going to be a tough year but they’ll snap out of it.”