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Nortel to face $800M charge
Financial Post - Saturday August 31, 2002
By Robert Thompson
Analyst says firm may violate its bank convenants
Nortel Networks Corp. will likely face more job cuts, take an US$800-million restructuring charge and
be forced to restructure its bank covenants, according to a report from an influential bond research
firm.
The report to institutional investors by Carol Levenson, an analyst at New York-based Gimme Credit,
follows Tuesday's earnings warning from Nortel. At that time the company said it would cut another
7,500 jobs and would come in US$270-million short of its financial guidance for its third quarter ended
Sept. 30.
Nortel did not refer to the charge it would take for the restructuring while announcing the revenue
shortfall, but Ms. Levenson wrote she expects the charge to be in the range of US$600-million to
US$800-million, half of which is expected to be in cash.
Nortel shares rose 2% yesterday to close at $1.68 on the Toronto Stock Exchange.
Nortel had US$5-billion in cash at the end of the second quarter and management has said it does not
expect to be forced to draw on its bank lines. The company raised US$1.5-billion in June in a common
share and convertible equity unit financing.
But given numerous earnings warnings over the past 18 months, Gimme Credit points out that
"management's forecasting ability is not unimpeachable."
Ms. Levenson wrote that even after the job cuts and if sales stabilize, Nortel won't make money in the
third quarter. "This implies even more restructuring ahead."
Sources inside Nortel have told the Financial Post that another 5,000 to 7,500 jobs may be cut by the
end of the year.
According to a securities filing, Nortel said its bank agreements call for adjusted negative earnings
before interest, taxes, depreciation and amortization of US$750-million, while the full year must reach
US$350-million.
That means Nortel's EBITDA earnings for the third quarter must turn positive, which suggests a
US$300-million sequential improvement. The company must also post a similar improvement for its
fourth quarter to reach the US$350-million target.
"This could be awfully tough to achieve," wrote Ms. Levenson.
The problem in meeting the EBITDA expectations is that Nortel's revenue continues to decline, as the
company indicated on Tuesday when it said it expected to record income of about US$2.5-billion for
the third quarter.
Bank covenants act as a formal debt agreement aimed at protecting the lender's interests. In the case
of Nortel, as the company's financial peril increases, the networking equipment maker's money
lenders face a higher risk and will expect higher interest rates.
Gimme Credit isn't the only organization to indicate it feels Nortel may be forced to renegotiate its
bank covenants.
Michael Urlocker, an analyst at UBS Warburg, said in a report issued this week Nortel is at risk of
violating its EBITDA covenant by the fourth quarter of 2002.
"This potential timing of this event has not changed from our previous estimate, only the degree of the
forecast violation has changed," Mr. Urlocker wrote.
He added that Nortel has been successful in avoiding issues with its bank covenants in the past by
either aggressively cutting costs or renegotiating with the banks.
In a report issued this week, Scott Penner at TD Newcrest said that even with the restructuring costs,
Nortel's cash position is stable. "Even with incremental restructuring costs, cash balances remain
above US$1-billion," he said. "Our outlook for survival is positively impacted."
Ms. Levenson's report indicates Gimme Credit feels Nortel will face issues with its bank covenants
and should renegotiate them. "Sure it's better to renegotiate now rather than when faced with a
possible violation later this quarter."
Nortel to face $800M charge
Financial Post - Saturday August 31, 2002
By Robert Thompson
Analyst says firm may violate its bank convenants
Nortel Networks Corp. will likely face more job cuts, take an US$800-million restructuring charge and
be forced to restructure its bank covenants, according to a report from an influential bond research
firm.
The report to institutional investors by Carol Levenson, an analyst at New York-based Gimme Credit,
follows Tuesday's earnings warning from Nortel. At that time the company said it would cut another
7,500 jobs and would come in US$270-million short of its financial guidance for its third quarter ended
Sept. 30.
Nortel did not refer to the charge it would take for the restructuring while announcing the revenue
shortfall, but Ms. Levenson wrote she expects the charge to be in the range of US$600-million to
US$800-million, half of which is expected to be in cash.
Nortel shares rose 2% yesterday to close at $1.68 on the Toronto Stock Exchange.
Nortel had US$5-billion in cash at the end of the second quarter and management has said it does not
expect to be forced to draw on its bank lines. The company raised US$1.5-billion in June in a common
share and convertible equity unit financing.
But given numerous earnings warnings over the past 18 months, Gimme Credit points out that
"management's forecasting ability is not unimpeachable."
Ms. Levenson wrote that even after the job cuts and if sales stabilize, Nortel won't make money in the
third quarter. "This implies even more restructuring ahead."
Sources inside Nortel have told the Financial Post that another 5,000 to 7,500 jobs may be cut by the
end of the year.
According to a securities filing, Nortel said its bank agreements call for adjusted negative earnings
before interest, taxes, depreciation and amortization of US$750-million, while the full year must reach
US$350-million.
That means Nortel's EBITDA earnings for the third quarter must turn positive, which suggests a
US$300-million sequential improvement. The company must also post a similar improvement for its
fourth quarter to reach the US$350-million target.
"This could be awfully tough to achieve," wrote Ms. Levenson.
The problem in meeting the EBITDA expectations is that Nortel's revenue continues to decline, as the
company indicated on Tuesday when it said it expected to record income of about US$2.5-billion for
the third quarter.
Bank covenants act as a formal debt agreement aimed at protecting the lender's interests. In the case
of Nortel, as the company's financial peril increases, the networking equipment maker's money
lenders face a higher risk and will expect higher interest rates.
Gimme Credit isn't the only organization to indicate it feels Nortel may be forced to renegotiate its
bank covenants.
Michael Urlocker, an analyst at UBS Warburg, said in a report issued this week Nortel is at risk of
violating its EBITDA covenant by the fourth quarter of 2002.
"This potential timing of this event has not changed from our previous estimate, only the degree of the
forecast violation has changed," Mr. Urlocker wrote.
He added that Nortel has been successful in avoiding issues with its bank covenants in the past by
either aggressively cutting costs or renegotiating with the banks.
In a report issued this week, Scott Penner at TD Newcrest said that even with the restructuring costs,
Nortel's cash position is stable. "Even with incremental restructuring costs, cash balances remain
above US$1-billion," he said. "Our outlook for survival is positively impacted."
Ms. Levenson's report indicates Gimme Credit feels Nortel will face issues with its bank covenants
and should renegotiate them. "Sure it's better to renegotiate now rather than when faced with a
possible violation later this quarter."
