US CREDIT-Investors split over Nortel firings
Wednesday April 28, 4:24 pm ET
NEW YORK, April 28 (Reuters) - Credit investors were
ambivalent about Nortel Networks Corp. (Toronto:NT.TO - News; NYSE:NT - News) on
Wednesday after the company fired its three top executives and
said ongoing accounting problems may run deeper than expected.
The news sent the cost of Nortel credit protection sharply
higher, suggesting that investors see a rising risk of the
company defaulting. The company's stock price plummeted almost
30 percent as investors fretted that a full-blown financial
scandal was building.
But bond investors were not quite as concerned and are
still valuing Nortel's debt around par. Many market watchers
believe that whatever near-term troubles the company has, a
blow-up of Enron proportions is unlikely.
"The company should weather this storm," said Scott
MacDonald, a bond analyst for Aladdin Capital who owns Nortel
stock but not its bonds. "We have to wait and see in terms of
their financial restating, but I think there is survivability
built into the balance sheet."
Nortel said it expected a restatement of 2003 results to
cut earnings by about 50 percent, but losses for prior years
would be reduced.
The cost of insuring Nortel against default rose to 362
basis points, or $362,000 per year for every $10 million of
principal insured, from about 250 basis points on Tuesday,
traders said.
Credit default spreads of that magnitude mean that
investors are demanding to be compensated as if there were
about a 5 percent chance of the company defaulting on its debt,
up from a 3.3 percent chance on Tuesday.
That compensation accounts for risks that fall short of the
company actually defaulting, such as the risk that the
company's bonds will fall further.
But while the credit derivatives market braced for further
bad news from the company, corporate bond investors still price
Nortel debt around par, suggesting that they are not
particularly worried about default.
"They're lulled by Nortel's liquidity and by the fact that
(Nortel) has raised money," said Margaret Patel, high-yield
portfolio manager for Pioneer Investment Management, who does
not own Nortel debt. "Also, all the restatements are referring
to history as opposed to looking forward."
Standard & Poor's took a skeptical view. It cut Nortel's
long-term corporate credit rating to "B-minus," its
sixth-highest junk rating, from "B."
Nortel said the restatement would not affect its cash
balance, which stood at about $3.6 billion on March 31. The
company does not face a major bond maturity until 2006, when
about C$2.3 billion comes due, analysts said.
Nortel's 6-1/8 percent notes of 2006 fell 2 cents on the
dollar on Wednesday to 100.75 cents on the dollar.
The accounting debacle is a disappointment to credit
investors who had cheered Nortel's comeback story. After losing
more than $27 billion in 2001 when telecommunications spending
cratered, Nortel staunched the red ink by by slashing costs and
improving its product mix.
One consolation for credit investors is that the company
apparently has not manipulated revenues, said Ping Zhao, an
analyst for independent research firm CreditSights.
Still, there is cause for concern, she said.
"My suspicion is that there is something quite major in
cost impairment to warrant the firing," she said.
Analysts' view is that Nortel's bonds could move lower, but
not dramatically.
"You've seen this company go from having huge problems in
terms of revenues slumping on regular basis and profitability
not being there at all to moving in the right direction and
turning around," said Aladdin Capital's MacDonald.
(Additional reporting by Dan Wilchins) |
