DBRS has announced:
has today changed the trend for the B (low) Issuer Rating and Pfd-5 (low) preferred share ratings of Nortel Networks Limited, Nortel Networks Corporation, and Nortel Networks Capital Corporation (collectively, Nortel or the Company), to Stable from Positive.
The rating action follows Nortel’s announcement today that: (1) a sustained and expanding economic downturn will pressure the Company’s operating and financial performance, (2) the Company will undergo further restructuring and cost reduction initiatives, and (3) the Company intends to explore a divestiture of its Metro Ethernet Networks (MEN) business.
DBRS had placed Nortel on Positive trend in July 2008. At the time, DBRS expected the Company could reasonably grow revenue in the low single-digit range, achieve gross margins comfortably above 40%, and grow and sustain operating margins above 8% (see separate press release dated July 14, 2008). DBRS had expected Nortel’s Enterprise Solutions and MEN businesses to be the primary drivers of expected operating improvement.
In light of Nortel’s revised business outlook, DBRS expects that the time horizon in which the Company can comfortably achieve these operating metrics has extended beyond what may be reasonable for the trend to remain Positive. Despite expected improvements in the gross margins (which are expected to remain above 40% at the end of the year), DBRS now anticipates that revenue growth and operating margin improvements will fall well short of previous expectations.
For the full year of 2008, DBRS now expects Nortel’s revenue to decline by just under 4% on a year-over-year basis, to roughly $10.6 billion, and operating margins are expected to remain well below 8% at the end of the year. DBRS expects Nortel’s liquidity to deteriorate slightly from historic levels, with the Company’s overall cash position declining to roughly $2.7 billion at the end of 2008.
With respect to its MEN business, while the impact of a divestiture on the Company’s consolidated financial and business risk profiles may be moderate, DBRS notes that exiting this business will remove the Company from a higher-growth segment, expected to be a partial driver of the Company’s overall operating improvement.
DBRS expects the long-term trend to remain Stable until DBRS can gain comfort on: (1) the relative mix in terms of the competitive and economic forces affecting the Company’s ability to achieve its long-term financial targets, (2) the impact on the Company’s financial and business risk profiles following any divestiture of the Company’s MEN business, and (3) Nortel’s long-term strategy to achieve meaningful and sustainable operating improvements in an intensely competitive and challenging operating environment.
Nortel prefs got hammered today, but not as badly as the stock:
Nortel, based in Toronto, fell $2.62, or 49 percent, to $2.68 at 4 p.m. in New York Stock Exchange composite trading, the biggest decline since July 1980, according to Bloomberg data.
The stock price has led to suggestions that a takeover is in order:
“The most likely option is that it will be acquired, either before or after a financial crisis,” suggested Duncan Stewart, president of Duncan Stewart Asset Management.
Stewart added that a deal might come before third-quarter earnings are released.
These issues were last mentioned on PrefBlog on March 10 in connection with their price differential:
NTL.PR.F closed today at 11.40-59, 10×7
NTL.PR.G closed today at 10.00-48, 15×10
Today,
- NTL.PR.F : 6.75-00, 10×5
- NTL.PR.G : 6.75-00, 3×15
What would be the effect of a takeover on the preferred shares? Could the buyer continue paying the dividends or would they automatically be redeemed?
It’s impossible to say for sure.
If they buyer simply made an offer (hostile or otherwise) for the common and bought control, there would be no impact on the preferreds at all – unless the buyer put something directly into the company. However, in such a case, you can assume that the prefs would be much more valuable, since a buyer wouldn’t spend the money without strengthening the company somehow.
It is possible that a deal could require the consent of preferred shareholders and they’d have to be given something. This is what happened with the BCE prefs; if that deal closes, they’ll be redeemed above par.
However, it’s possible that the buyer could reach a conditional friendly deal with the company … conditional on Bad Things happening to the preferred shareholders with their consent. This is what happened in the Thornberg Mortgage reorganization discussed on July 22 – the prefs were asked to accept a deal that paid them 20% of par value and told that the alternative was worse. They accepted.
And finally, the buyer could buy the common, but announce that preferred dividends are frozen until future notice. This could be done without preferred shareholder consent – and this is what has happened in the Fannie & Freddie Takeover.
So … no guarantees! A takeover would be probably good … but this is by no means assured.
[…] These issues were last mentioned on PrefBlog when DBRS changed the trend to “Stable” from “Positive”. […]