Networking equipment maker Nortel Networks Corp is preparing to raise up to $2.5bn in cash through the issuing of securities in order to increase its liquidity and quell fears that it could fall into a funding gap.

The Toronto, Canada-based company withdrew an SEC filing made eighteen months ago which registered a potential $1.0bn securities sale, and gave notice that it would replace it with a new shelf registration which would give it the right to sell up to $2.5bn worth of equities, warrants or bonds.

Simultaneously the company posted its 10-Q report of its financials for the three months to the end of March 2002. In it, the company explains that it believes that its $3.1bn cash will be sufficient to meet its requirements through the next 12 months, with the help of its credit facilities called in only for cash flow fluctuations between quarters.

However it also states in the filing that it recognizes that if revenues and cash flows are lower than expected, it may need to reduce capital expenditure further and gain external funding.

For the three months to the end of March the company burned through $476m of its cash through its continuing operations, and the company gave little assurance for future quarters. "We expect our customers to continue to limit capital expenditures and, therefore, it is difficult to predict how spending patterns will unfold in 2002," said CEO Frank Dunn last month.

Nortel is currently focused on introducing efficiencies that will help it reach breakeven at a lower top line and has almost halved its workforce over the past eighteen months. It expects to be down to about 44,000 employees when the current round of layoffs is completed.

Its new cost structure, due to be in place by the end of the year, will let it break even at $3.5bn of revenue, not including one-off charges, some $600m more than its first-quarter sales.

With such a high cash-burn rate, and the telecommunications market it serves showing absolutely no signs of recovery, it obviously felt the need to act now to preserve its liquidity.

Should it attempt to raise the cash through bonds, it will have to do so at a higher cost as credit rating agency Moody's cut its status to junk last month. Investors concerned that equity share issues would substantially dilute their own holdings pushed its New York Stock Exchange listed stock down over 14% in early trading yesterday.

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