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A US$1-billion offering of senior convertible notes by Nortel Networks Corp. (NT) will help the telecommunications equipment maker reduce its interest payments, but the move could also hurt the stock.

This is because convertible debt offerings generally occur when a stock is peaking in terms of market sentiment, while also potentially creating a technical selling point for some, according to Merrill Lynch’s Vivek Arya, who has a ‘neutral’ rating on Nortel shares.

“Given Nortel’s uncertain cash flows, we believe the refinancing is a positive move and improves Nortel’s flexibility,” the analyst said in a note to clients.

Despite this move, Mr. Arya doubts whether Nortel is out of the woods given that the telecom market’s challenging conditions could force the company to raise more money at a later date.

He also noted that Nortel has been unable to generate positive cash flow in any two consecutive quarters for the past three years and remains concerned about what he calls its “weak portfolio and lack of any tangible restructuring progress.”

Despite recent declines for Nortel shares, Mr. Ayra sees more risk if rival Alcatel-Lucent (NYSE:ALU) reports weak first quarter results in late April.

Source: Merrill: Nortel's $1 Billion Senior Convertible Offering May Hurt Share Price