Nortel Bonds Fall on Lower Forecast

The telecom sector’s meltdown continued Wednesday, as Nortel Networks Corp. bonds--rated investment grade as recently as April--fell to less than half of face value after the company’s warning that near-term sales will miss forecasts.

Nortel’s bonds with a 6.125% annual coupon, maturing in 2006, slid $5.50 to $48 per $100 face value. The bonds had traded at 80 cents on the dollar in April, before the debt was downgraded to “junk” level.

Nortel and rival Lucent Technologies Inc. have seen their bonds sink since 2000 as sales of switches and routers have dropped, and as many other telecom firms have collapsed into bankruptcy.

The companies’ cash levels--much of it raised from sales of convertible preferred equity securities earlier this year--will dwindle until the firms stem operating losses, investors said.

“Lucent and Nortel both still have substantial cash, but as time goes by and you still see a soft market for orders, depletion of these cash reserves will impair bondholders,” said Stephen Ardizzoni, who doesn’t own either company’s bonds in the $450 million he manages at SMH Capital Advisors.

The prices of Nortel bonds indicate investors lack confidence that the company will be able to repay its debt. About 75% of companies whose bonds trade below 50 cents on the dollar end up restructuring their debt within three years, said Mike Taylor, a high-yield bond analyst at Bear Stearns Cos.

“They’re essentially shut out of the capital markets,” Taylor said.

Companies in Nortel’s position sometimes try to restructure debts with creditors rather than file for bankruptcy protection. Restructuring options include offering bondholders some combination of cash, stock and new debt in exchange for existing bonds, Taylor said.

Nortel spokeswoman Tina Warren declined to comment on whether the company plans a debt restructuring.

Nortel, North America’s second-biggest maker of telecom gear, said Tuesday that sales in the current quarter will fall as much as 10% from the second quarter.

Nortel’s shares on the New York Stock Exchange fell 19 cents to $1.04. They rallied as high as $1.29 last week after falling to a record low close of 82 cents July 26.

Nortel’s debt is rated Ba3 by Moody’s Investors Service and BB-minus by Standard & Poor’s. Moody’s said Wednesday that it may further cut its rating.