Nortel's Post-MEN Plan: Pay Down Debt

One of the big questions surrounding Nortel’s (NT) plan to sell its fast-growing metro Ethernet network business is: why? Why kick out MEN when it’s one of your few growth assets?

While Nortel may publicly proclaim it’s part of a strategic focus on enterprise/carrier VoIP and services/software, another explanation is Nortel needs cash to pay down debt. In particular, it has US$1-billion of Floating Rate Senior Notes due 2011. According to Nortel’s last 10-K, the had an interest rate of 9.4925% per annum as of December 31, 2007.

Assuming Nortel gets $1-billion to $2-billion for MEN, some or all of the proceeds could be used to redeem the 2011 notes. That would significantly reduce Nortel’s debt load and improve profitability by slashing its interest rate payments.

Another scenario is Nortel is already buying back the 2011 notes, which apparently trade at a deep discount. Let’s say, for example, it wanted to redeem $500-million of notes. At 70 cents on the dollar, this would cost $350-million.