Nortel's Metro Ethernet Business - For Sale, Must Pay Cash

by: FP Trading Desk November 17, 2008 | about stocks: NT    

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When Nortel Networks Corp. (NT) announced in September that it was selling its Metro Ethernet business, the decision came as a surprise since investors were already concerned about the company’s declining operating results. Nortel’s recently announced restructuring, meanwhile, appears to be aimed at making the sale of its various units easier.

The company’s cash burn rate and debt position with $1-billion of debt due in July of 2011, has some suggesting it may face bankruptcy if the situation does not improve dramatically. “While Nortel is not yet facing a liquidity problem, bond prices are signalling a restructuring with insufficient asset value to cover the debt,” Gimme Credit analyst Kimberly Noland told clients.

While the price tag for its Metro Ethernet business now looks to be closer to $750-million – much lower than Nortel had originally hoped – the credit crunch has made the sale process challenging. Nortel may have put the sale on a fast track, but full price cash buyers may be hard to find, Ms. Noland said. Nonetheless, “a cash sale where proceeds are used to reduce debt would be positive for bond prices,” she added.

The analyst downplayed the company’s potential refinancing problem given the expected sale of Metro Ethernet unit, alternative sources of financing and cost-cutting options. She recommends Nortel’s 10.75% bonds given their coupon yield of nearly 40% and her view that negative news will be limited in the coming months.

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