Looks like the beginning of the end to me ...

Nortel downgraded to B (high) and R-3 (low) by DBRS                        
                                                                           
Nortel Networks Corp                                                     NT
Shares issued 3,213,742,000                              Aug 29 close $1.65
Thu 29 Aug 2002                                               Rating Review

Mr. Paul Holman of Dominion Bond Rating Service reports

       Nortel Networks Corporation

Rating:            B (high)
Trend:             Negative
Rating action:     Downgraded
Debt rated:        Convertible notes

         Nortel Networks Limited

Rating:            R-3 (low)
Trend:             Negative
Rating action:     Downgraded
Debt rated:        Commercial paper

Rating:            B (high)
Trend:             Negative
Rating action:     Downgraded
Debt rated:        Notes and 
                   long-term senior debt

Rating:            Pfd-5 (low)
Trend:             Negative
Rating action:     Downgraded
Debt rated:        Class A redeemable 
                   preferred shares

Rating:            Pfd-5 (low)n
Trend:             Negative
Rating action:     Downgraded
Debt rated:        Class A non-cumulative 
                   redeemable 
                   preferred shares

Nortel Networks Limited's (Nortel or the company) long-term rating has been
downgraded to B (high) from BB (low), with a continuing negative trend. The
downgrade reflects an ongoing decline in  the  sector  and  the  fact  that
Nortel  expects  revenues to be lower again over the near term. This is due
to even lower capital spending by  operators  such  as  WorldCom  Inc.  and
Telefonica  Moviles,  S.A.  This  situation  could  grow  worse  before  it
stabilizes.

Over the next few months, Nortel's challenge will be to shrink  itself  yet
again  to  try  to restore profits. However, with each downsizing plan, the
level of difficulty and complexity to  make  change  becomes  progressively
greater.  Once again, Nortel needs to lower its break-even target, now from
$3.2-billion (U.S.) to below $2.6-billion (U.S.) in quarterly sales.  Since
Nortel  has  already shed its marginal businesses, it will need to consider
exiting some core operations that  provide  marginal  returns.  Next  year,
Nortel will need a product mix that can provide, at a minimum, $2.6-billion
in quarterly sales, yielding 40-per-cent margins (up  from  34  per  cent),
using 7,000 fewer people. As well, it will need to make large reductions in
R and D and SG and A expenses,  thereby  limiting  future  prospects.  This
represents  a  huge,  costly  undertaking  with significant execution risk,
especially  since  the  company  has  yet  to  reach  break-even   at   the
$3.2-billion  level.  Moreover,  any  delays  in getting to break-even will
perpetuate the cash-burn rate, where some of the cash  shortfall  could  be
financed  with  debt.  If  the gross margins remained near 35 per cent, the
cash-burn rate could range between $500-million (U.S.) to $1-billion (U.S.)
annually. In addition, vendor financing and capex would need to be funded.
While liquidity is adequate at this time, including $4.9-billion (U.S.)  in
cash  on  hand (end of Q2, which will decline by year end) and $3.4-billion
(U.S.) in bank lines, this could  change  next  year  with  any  cash  flow
deficits,  vendor financing and credit agreement changes if covenant limits
are tested later this year. With  the  uncertainty  relating  to  when  the
industry  will  stabilize, the rating remains on a negative trend. Over the
next 18 months, without a return to growth, the industry could be forced to
consolidate to reduce the number of competitors.