High-yield portfolio managers and a sell-side investment-grade analyst are divided in their views regarding the bonds of telecommunications equipment maker Solectron Corporation, and one of its chief customers, Nortel Networks.
A Boston-based high-yield portfolio manager argues that Nortel and Solectron are among the most vulnerable in the high-yield market due to continued declines in revenues and problems in their capital structures. Though Nortel still has an investment-grade rating of Baa3/BBB-, a downgrade to junk would trigger a provision in the company's outstanding convertible and high-yield issues, making them pari passu with bank debt. An investment-grade analyst argues that such an event would be a positive from a bondholder's perspective, but the Boston-based manager is not convinced that Nortel's asset coverage is sufficient to compensate bondholders in the event of a bankruptcy. Further, the manager argues that the company is not cutting costs quickly enough. The dealer analyst counters that while revenues are difficult for the entire sector, Nortel has better gross margins than Lucent Technologies, and was trading 6.5 points cheaper last week. Last Tuesday, the Nortel 6.125% notes of '06 were bid at 73.5, while the Lucent 7.25% notes of '06 (B2/B+) were bid at 80.
As for Solectron, the portfolio manager argues that the company may face a cash crisis as it has convertible puts coming due in May of '03. Solectron's zero coupon convertible bonds of '20 were trading at 56 last week, and are puttable at 63. One portfolio manager who has a small position in the name says the company has plenty of cash and doubts his firm will sell, but declined to elaborate further. The Solectron 7.375% notes of '06 (Ba1/BB) were trading at 98 last Wednesday.