Wednesday, January 14, 2009
Nortel Files for Bankruptcy Protection
By BEN DUMMETT TORONTO -- Nortel Networks Corp. filed for bankruptcy protection in Canada and the U.S. on Wednesday, citing a need to put itself "on a sound financial footing once and for all." The troubled Canadian maker of telecommunications equipment and some of its units filed for court protection in Delaware and Ontario a day before the firm was due to repay $107 million in bond interest. The company said subsidiaries are expected to make similar filings in Europe. Previously Uncertainty Weighs on Nortel 12/16/08Nortel Told It May Face Delisting 12/12/08Nortel Seeks Bankruptcy Advice 12/10/08The application under the Companies' Creditors Arrangement Act in Canada will be heard later Wednesday by the Ontario Superior Court of Justice. The filing signals the failure of efforts by Nortel, once a technology icon and the country's biggest company by market capitalization, to sell assets in its bid to raise additional liquidity in the face of declining demand for telecom equipment, as a result of the global economic slowdown. Some of Nortel's assets, particularly its wireless-network equipment and enterprise businesses, could attract interest now that it's in bankruptcy protection. Until now, would-be buyers have likely been scared off by Nortel's debt load. In addition, they were likely betting they could acquire assets at a cheaper price if Nortel was forced to sell them under bankruptcy protection, one analyst said. Though demand for Nortel's products has been declining, it still has a large installed customer base. A bigger and stronger telecom-equipment vendor could try to generate additional business by acquiring these customers. Getty Images Mike S. Zafirovski, president and CEO of Nortel, speaks at a press conference in this 2007 file photo. The telecom-equipment company said its normal day-to-day operations will continue without interruption as it works to deal with its cost and debt burden, to effectively restructure its operations and to narrow its strategic focus. It noted that it began a process to turn itself around starting in late 2005, and has made progress, but that the global financial crisis and recession have compounded its financial challenges and hurt its ability to complete this transformation. It said it's taking this action now, with a $2.4 billion cash position, "to preserve its liquidity and fund operations during the restructuring process." However, others are betting Nortel won't emerge from bankruptcy protection as a standalone company. Often, companies seek bankruptcy protection in order to restructure so that they emerge as a viable entity with little or no debt. The difference for Nortel is that it doesn't have a viable business, said one Nortel bondholder, who is betting the company will be sold off in pieces. Nortel "is a bad company with a good balance sheet, not a good company with a bad balance sheet," the bondholder said. Regardless, Nortel's existing equity holders will likely end up with nothing, while the bondholders could get up to 50 cents on the dollar, given Nortel's current cash position of $2.4 billion, the bondholder said. Earlier Wednesday, Nortel's bonds were trading around 20 cents on the dollar. Nortel said it will also ask the courts to impose certain restrictions on trading in its common shares and Nortel Networks Ltd.'s preferred shares, in order to preserve valuable tax assets in the U.S. Trading in Nortel's stock was halted in both Toronto and New York. The stock closed at 32 cents on the NYSE Tuesday. Nortel said its has entered into an amendment to arrangements with its key supplier, Flextronics International Ltd., which it said give the subsidiary "confidence that Flextronics will continue to maintain the supply chain following commencement of the creditor-protection proceedings." Nortel has agreed to purchase $120 million of existing inventory by July 1 and to make quarterly purchases of other inventory, and has also agreed to terms relating to payment and pricing. The amendment is subject to Canadian court approval. Certain arrangements with Flextronics will terminate in July as a result of the exercise by Flextronics of its termination rights under the agreement, it noted. —Carolyn King contributed to this article.