<font color=red>S&P cuts Nortel ahead of expected $19.2 bln loss
Wednesday July 18, 5:28 pm Eastern Time
(UPDATE: New throughout, adds Nortel comments, byline)
By Jonathan Stempel
NEW YORK, July 18 (Reuters) - Nortel Networks Corp.'s (NYSE:NT - news)(Toronto:NT.TO - news) credit and debt ratings were slashed on Wednesday by Standard & Poor's, one day before the telecommunications equipment supplier is expected to report a $19.2 billion second quarter loss amid weak demand for telephone equipment.
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S&P cut Brampton, Ontario-based Nortel's long-term corporate credit and senior unsecured debt ratings three notches to ``BBB'' from ``A'' and its short-term corporate credit and debt ratings to ``A-2'' from ``A-1.''
The new ratings are two notches above junk status. S&P's outlook is negative, meaning conditions are present that may lead to more cuts, not that cuts are imminent. Nortel is expected to announce its second quarter results after the close of trading on Thursday.
Responding to the downgrade, David Chamberlin, Nortel's director of global communications, said: ``This action is not expected to have a significant impact on our business. We are continuing to make significant progress on our realignment plan. This leaves Nortel's ratings solidly within the investment grade category.''
S&P said its cuts reflect ``significant uncertainties about the company's ability to return to profitability in light of substantial deterioration in the communications sector.''
Nortel, it said, should face ``slower overall market growth'' and ``slower demand'' for its products into 2002, and that its ratings could fall further if it fails to achieve close to break-even net earnings for continuing operations by the end of the year.
Nortel's expected $19.2 billion loss, which includes $15.2 billion of writedowns related to recent purchases made when the technology sector was booming, is one of the biggest in corporate history. Analyts said they expect Nortel to avoid a liquidity crisis if it cuts costs and generates enough cash to fund its $3 billion debt load, $1 billion of which matures within a year.
Nortel's bonds already trade like junk bonds, and its 6.125 percent notes maturing in February 2006 were recently offered in the area of 90 cents on the dollar, with a yield to maturity of 8.83 percent.
On July 3, Moody's Investors Service cut its long- and short-term ratings for Nortel to ``A3'' and ``Prime-2,'' respectively two notches higher than and equivalent to S&P's new ratings, and warned it may cut the long-term rating again.
Last month, the largest U.S. telecom equipment supplier, Lucent Technologies Inc. (NYSE:LU - news), saw its ratings fall to junk status.
In cutting its ratings, S&P also assigned Nortel's Class A preferred stock a ``BB-plus'' global scale and "P-3 (High) Canadian national scale ratings with similar ratings from the Canadian Bond Ratings Service, which merged with S&P last October. S&P said CBRS' old ratings have been withdrawn.
Nortel shares closed Wednesday on the Toronto Stock Exchange at C$11.60, down 65 cents, and on the New York Stock Exchange at $7.58, down 32 cents. The shares have fallen 90 percent in the last year.
(Additional reporting by Luke McCann in Toronto.)
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