Gimme Credit Likes Nortel Bonds

Nortel sold $2-billion of high-yield bonds in July to, in part, retire a $1.3-billion bank credit facility. Gimme Credit said the 10-year bonds with a yield of 10.5% are pretty attractive to investors. “With ample near term liquidity, this bond looks interesting for aggressive accounts seeking yield, but we will need to reasses this name on a regular basis given our concern about fundamentals”. Gimme Credit estimates Nortel will generate negative free cash flow this yar after accounting for more than $1-billion of interest expenses, capital spending and pension funding.

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2 Responses to “Gimme Credit Likes Nortel Bonds”

  1. Observer Says:

    These bonds are unsecured beyond NNL. A 10% yeild on $2 billion is $200M/year, further burdening Nortel’s already negative cash flow.

    Moody’s Indicates:
    “affirmed Nortel’s B3 corporate family rating, assigned a B3 rating to its proposed $2 billion senior note sale. The corporate family rating reflects major challenges still facing Nortel in restoring revenue and profitability growth, weak credit metrics, and difficulty in getting its internal operations in order”

    B3 rating means:
    Rating “B”
    Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments of of maintenance of other terms of the contract over any long period of time may be small.

    The number 3 suffix means it is the lowest tier in the B ratings:
    A Moody rating may have digits following the letters, for example “A2” or “Aa3”. According to Fidelity, the digits in the Moody ratings are in fact sub-levels within each grade, with “1” being the highest and “3” the lowest. So here are the ratings from high to low: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, B1, B2, B3…and so on.

    also note Nortel’s cash is declining fast to under $2 billion now from 4 billion only a few years ago. Tom Aistle already predicted this:

    14:48 EDT Thursday, May 11, 2006
    2:48 (Dow Jones) National Bank analyst Tom Astle based on NT’s 2005 10K suggests Nortel “has an increasing need to raise capital”. He expects it to be straight debt. Even with debt financing, the analyst predicts NT’s cash balance will fall to $1.6B by year end from about $3B currently and notes NT has a $1.8B debt issue coming due in 2008. “It looks like Nortel’s treasury department will be as busy as the accounting and legal groups,” he says.

    They have sold manufacturing, their sprawling headquarters, the last of their assets to a negative postion, closed campuses, and now business (UMTS) while the greatest asset on their books is a tax credit.

    Considering they issued high yield bonds for this “straight debt” as Aistle writes, they also have large regulatory fines to address (and I suspect government fines too since the fraud was admitted) to be taken from this anticipated declining $1.6B cash.

    Fines won’t take declining shares or risky bonds (the paper shares/bonds Nortel printed for fraud cost them nothing since the $2 billion bonds also pay the cash portion of shareholder settlement, they still keep their hard fought fraud bonuses to this day that created this mess to begin with for a eyar restated/revised worst every time they recount it). Credibility issues remain.

    There is also the issue of 14.5% of the equity liquidated to shareholder lawsuits and reverse splits as they traditionally dilute 100M/shares a year, by far more than they earn by losing more money every year.

    Nortel appears to be still shrinking in a death spiral, still revising numbers with nightmare fundamentals, and with “no easy fixes” or “miracles” as the CEO claims. They are facing a smaller market with customers merging and greater comeptition as competitors merge. Combined with their shedding business units after depleting so many assets, one should indeed remain worrisome in connection with the long term prospects for these unsecured bonds.

    This company neared insolvency once before with seemingly exponentially less woes and things arn’t getting any better.

    In connection with the $1.8B debt in 2008, issuing bonds in the future will also be more difficult since pension liabilites must be explicitly listed than appear as a footnote. Interesting they anticipate coincidentlally repairing internal controls (they extended years) by 2008.

    Trust should remain a huge factor due to endless other reasons and ongoing events too I would imagine. This company is full of contradictions and surprises. Nothing should shock anyone anymore in this saga.

  2. jamezzz babysitter Says:

    Is there anything else you want to tell us jamezzz?LOL

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