At Nortel, All the Straws Are Short


Tense times at Nortel Networks, stemming from its ongoing accounting woes, are about to become even more tense. The Brampton (Ont.) telecom-equipment giant faces a May 29 deadline to present audited financial data to a key financial guarantor -- or possibly face a multimillion-dollar payment. That deadline has the potential to create a financial crunch, analysts say.

Bondholders are already jittery. One of the company's five notes, worth $200 million, traded down from the 80-cent mark on May 17 to as low as 75 cents on the dollar by May 20, according to Advantage Data, which researches the bond market. "There's no question Nortel (NT) is approaching a distressed situation," says Advantage analyst Pierre Robert. "People are definitely getting antsy."

A BusinessWeek analysis of Nortel bonds shows that trading is on a roller coaster. Pricing is down sharply from February but appears to be inching back up again. The $200 million note, trading at 99 cents in February, bounced from 75 cents last week to hit the 80-cent mark on May 25. And a $150 million note, trading at 104 cents on the dollar in February, fell to 85 cents early last week, but was up to 87 cents on May 25.

NATIONAL PRIDE. What's the bond market worried about? Nortel could soon be in default of a $326 million guarantee by Export Development Canada (EDC), which recently granted a temporary waiver to allow the outfit the time to prepare audited financials on the state of its business. Come May 29, that waiver expires -- and Nortel has stated it won't be ready to produce key financial documents by that date.

Both sides are in negotiation, and an EDC spokeswoman says Nortel will likely make some announcement on the status of the waiver on or before May 29. While some analysts believe it's unlikely that a Canadian creditor would close the door on an important Canadian company, there are still concerns that EDC could force Nortel to pay up.

"One can imagine a scenario where EDC says, 'We want out,'" says Bruce Hyman, director of telecom equipment for Standard & Poors Ratings Service. "Then bondholders might say, 'If EDC won't support the biggest company in Canada, why should I?'" A spokeswoman for Nortel confirmed that it's in discussions with EDC, but she declined to comment on the possibility of default triggered by EDC or bondholders.

SPEED BUMPS. The bondholders are key players in Nortel's unfolding drama. Whenever 25% of any bond's holders are in agreement, they could trigger a notice of default, launching a 90-day period during which Nortel would have to produce financial reports. If it doesn't, then the bond accelerates, meaning Nortel would have to pay down the debt on the bond. Then holders of other bonds could also demand payment with only 10 days notice.

As of Dec. 31, 2003, Nortel had long-term debt of $3.9 billion. Problem is, it now has just $3.6 billion in cash on its books. Acceleration of payment "would not be a good thing," observes Lehman Brothers telecom-equipment analyst Steven Levy. According to a May 10 TD Securities report, Nortel disclosed that 34% of the $150 million issue is in the hands of related bondholders.

Getting the formal consent of 25% of a note's holders on anything isn't easy, however. And holders of Nortel's largest bonds, like the $1.5 billion note due in 2006, say acceleration is highly unlikely. But among the smaller bonds, it's "clearly possible," says one bondholder privately.

TOUGH MEASURES. If default is triggered by bondholders and the payment clock starts, Nortel could face the risk of bankruptcy, analysts say. "It's not likely," Levy explains, "but it's still a bothersome-enough possibility." Nortel declined to comment on such a risk.

Nortel clearly has enough cash to pay off its smaller bonds. But in the unlikely event that it's pushed to pay off its entire debt, it would have to find other sources of liquidity. One option would be to sell assets -- anything other than core assets, such as its wireless and IP operations, which are showing strong performance.

Or Nortel could sell up to $3 billion in preferred stock. That would be dilutive to stockholders, but it would stave off more dire consequences while simultaneously satisfying bondholders. But all in all, it's a tactic investors want Nortel to avoid at all costs. By Roger O. Crockett in Chicago


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