DBRS Confirms Nortel Networks Limited/Corporation Long-Term Ratings at B (low)

Dominion Bond Rating Service (“DBRS”) has today confirmed the long-term ratings of Nortel Networks Capital Corporation, Nortel Networks Corporation, and Nortel Networks Limited (collectively “Nortel” or the “Company”) at B (low) along with the preferred share ratings of Nortel Networks Limited at Pfd-5 (low). All trends are Stable.

The unsecured ratings of Nortel remain at B (low) with the Company recently completing a US$2 billion debt refinancing that has given Nortel a 100% unsecured debt structure. Despite the removal of the secured debt from its capital structure, DBRS has maintained the unsecured ratings of Nortel at B (low), reflecting heightened concerns about Nortel’s ability to improve its operating performance despite the Company implementing a strategy to improve its competitive position over the medium term. DBRS’s concerns are predominantly attributable to revenue and margin pressures resulting from customer consolidation and the increasing presence of emerging market vendors in both the wireline and wireless segments, both of which negatively impacted Q1 2006 results.

However, DBRS does acknowledge that this recent debt issuance extends the Company’s debt maturity profile, with the nearest debt maturity being US$1.8 billion in 2008. In addition, Nortel will maintain a cash balance of approximately US$2.6 billion pro forma the debt issuance, which provides the Company with a significant cushion to absorb contingencies, such as potential cash settlements relating to the U.S. Securities and Exchange Commission and Ontario Securities Commission investigations. In addition, Nortel will need to make substantial payments related to pension funding (US$425 million) and cash payments relating to previous restructuring initiatives (US$110 million); thus, Nortel’s debt levels are expected to remain high for the near term.

DBRS will continue to monitor Nortel’s progress on several key issues over the next 18 months. These issues include the Company’s ability to grow revenues above the current US$10.5 billion annual run rate while keeping its gross margins above 40%; and the implementation of its new financial reporting system. The system should assist management in providing more timely reporting and helping to resolve several of the outstanding material weaknesses relating to internal controls, which have weighed negatively against the Company’s credibility.

DBRS notes that if Nortel can improve its cash flow from operations over the medium term, which targets approximately US$1.5 billion in margin improvements over the next three years, while resolving most of its outstanding contingencies without a significant deterioration of its current financial profile, the potential for ratings improvement may exist.

Note:
Nortel has two types of Class A Preferred Shares; for one of these types, the unpaid dividends are non-cumulative.