DBRS Confirms Ratings of Nortel Networks at B (low), Trend Stable

DBRS has today confirmed the ratings of Nortel Networks Corporation, Nortel Networks Limited and Nortel Networks Capital Corporation (collectively, Nortel or the Company) at B (low). The trend is Stable.

DBRS notes that Nortel has become disadvantaged by the size and scale achieved by its primary competitors in each of its respective market segments. As a result, the Company is now the smallest among the large integrated communications vendors as measured by revenue. DBRS further notes that Nortel has struggled to profitably maintain the leadership positions it once held in key technologies. Further pressuring the Company’s ability to improve operating performance are revenue challenges due to a consolidating customer base and the increasing pricing pressure brought on by emerging market vendors such as Huawei and ZTE, which currently have cost advantages. These and other broad business risks facing the communications solutions industry and Nortel’s relative position within the industry are important drivers of the overall credit rating DBRS has established for the Company.

Despite the backdrop of a challenging business landscape, the Company has made significant progress in its revitalization efforts by settling its class action lawsuits and investigations by the U.S. Securities and Exchange Commission (SEC) and the Ontario Securities Commission. Each of these items has consumed enormous Company resources and DBRS notes that resolving these actions is a significant milestone.

Additionally, DBRS notes that the Company has, over the course of 2007, made significant progress with its finance transformation and has extended its debt maturity profile with the issuance of notes and convertible notes, thereby removing refinancing risks that existed while the Company completed its financial restatements.

The above-noted actions all serve to put the Company on a solid footing from which Nortel must now focus on revenue and operating margin improvement in the face of challenging industry conditions.

The Company has communicated a plan to improve operating margins to approximately 13% in the medium term, primarily by maintaining gross margins above 40% through reduced input costs and by eliminating significant general and administrative expenses, primarily through headcount reductions.

DBRS notes the Company’s CDMA business continues to maintain a strong market presence while the Enterprise Solutions segment is experiencing traction in international markets with its data networking solutions. Metro Ethernet Networks is now experiencing double digit revenue growth as Internet backbones and metro optical networks experience increased traffic due to large increases in IP based video traffic. However, legacy products such as ATM and central office switches, areas of Nortel’s traditional strength, continue to experience declines in revenue.

DBRS notes that Nortel has the opportunity to improve its rating by producing objective results with the Company’s cost reduction initiatives, specifically its general and administrative costs, combined with revenue growth in line with the industry and gross margins being maintained at or above the 40% threshold. Accomplishment of these objectives should be observed in operating margins improving to above 4% for the full year 2007; approaching 10% by 2008.

Note:
All figures are in U.S. dollars unless otherwise noted.