Moody’s Cuts Nortel Rating to Junk Status

Nortel Networks Corp. had its credit rating cut to junk by Moody’s Investors Service Inc., triggering a provision in the company’s bank lines that gives creditors title to its assets in the event of a bankruptcy filing.

Moody’s reduced Nortel’s senior unsecured debt rating three levels to “Ba3,” the third-highest junk grade, from “Baa3,” the lowest investment grade. The reduction affects $5 billion of Nortel debt.

The cut to junk trips a clause in the company’s loan agreement that requires Nortel to pledge assets to back up debt, and banks and bondholders will benefit equally.

Nortel has about $4 billion of untapped credit from banks, which typically rank ahead of bondholders in staking claim to assets.

“It is good news for bondholders that they now have the security here,” said Ziki Slav, who follows Nortel for Dresdner Kleinwort Wasserstein-Grantchester.

He recommends buying bonds of the telecommunications equipment maker because of the provision.

Nortel shares fell 11 cents to $4.24 on the NYSE.