Moodys Takes Issue With S&P View of GENBAND-Nortel

Oh, what a dangerous web competing ratings services can weave, raising the question, “Who’s right?”

Well, perhaps it’s best to draw one’s own conclusion. In the meantime, Moody’s Investors Service has issued its own opinion of GENBAND’s purchase of Nortel Networks’ carrier VoIP group – this after Standard & Poor’s draped GENDBAND with a negative outlook because of the deal.

Au contraire, says Moody’s: The $182 million transaction gives GENBAND a stable ratings outlook. Yes, price erosion and growth prospects for VoIP softswitch and gateways for service providers are of some concern, as is the integration of Nortel with GENBAND, but there’s a lot of cash on hand that helps even out matters.

Moody’s expects the Benjamins to fund working capital, restructuring and transition costs, and provide a substantial cushion. For that reason, Moody’s gave GENBAND a ‘B2’ rating. That designation indicates high credit risk and a generally poor credit quality, but affected companies have been known to prove these perceptions wrong.

Moody’s also predicts GENBAND will create double-digit margins before interest, tax depreciation and amortization are taken into account. That’s despite the carrier VoIP division at Nortel experiencing several years of revenue decline due to shrinking TDM switch business, provider cutbacks thanks to the downturn, Nortel’s bankruptcy filing and price erosion in the VoIP softswitch and media gateway fields, Moody’s said. Once GENBAND digests Nortel, it will boast a wider range of products and therefore hold a stronger place in the market. In other words, even though Nortel is all but kaput, its R&D and brain trust expertise lives on.

Thus, Moody’s is counting on GENBAND’s “large cash balances” – as it noted in a press release – to sufficiently fund Nortel’s integration. But, the company added, ratings could go down if GENBAND’s sales continue to decline. And that’s one point on which Moody’s and S&P agree.

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