S&P Revises Nortel Networks to Positive

Standard & Poor's Ratings Services has revised its outlook on Nortel Networks to positive from stable. At the same time, S&P also affirmed the ratings, including the 'B-' long-term corporate credit rating, on the company. At March 31, Nortel had about US$4.6 billion of debt outstanding.

"The revised outlook primarily reflects the steady improvement in profitability in the past several quarters despite difficult market conditions," said Standard & Poor's credit analyst Madhav Hari. "We expect this operating momentum to continue in the near term, mostly driven by the net benefit derived from the company's fiscal 2008 and previous years' business transformation initiatives," Mr. Hari added.

S&P says that Nortel's exposure to legacy offerings remains significant and will likely pressure near-term revenue growth; however, the company's portfolio of growth products and services has shown good traction in recent quarters thereby mitigating the risk of large revenue losses. Furthermore, cash balances of more than US$3.2 billion have remained stable and should allow the company to execute its turnaround strategy in addition to providing healthy credit support.

The positive outlook is based on Nortel's steady improvement in its profitability metrics and stabilized revenue erosion within its core operations despite difficult market conditions. Healthy liquidity should allow the company to execute its turnaround strategy while additionally providing near-term credit support. Consideration for a ratings upgrade will depend on the company's ability to meet 2008 guidance with respect to revenues (of mid-single-digits) and profitability (operating margins of about 6.7%), while maintaining cash balances in excess of US$3 billion. We could revise the outlook to stable (or even to negative) should its liquidity position weaken materially or the company fail to demonstrate additional operating margin improvement possibly owing to a meaningful deterioration of its revenues.

Posted to the site on 21st May 2008