January 14, 2009

Nortel Files For Bankruptcy As Financing Dries Up

Telecommunications gear maker Nortel Networks Corp. filed for bankruptcy protection in the U.S. and Canada today, following losses from a sharp drop in orders and the failure to secure adequate financing amid a growing recession.

The Toronto-based company, North America's largest maker of phone equipment, filed for court protection one day before it was set to make a $107 million interest payment, for which the company was granted protection in Ontario Superior Court today.

The protection against its creditors will provide Nortel additional opportunities to pursue restructuring options or sell its assets.  

Nortel issued a press release saying that the company had been executing a turnaround strategy since late 2005, but "the global financial crisis and recession have compounded Nortel's financial challenges and directly impacted its ability to complete this transformation."

"Nortel must be put on a sound financial footing once and for all," said Nortel's CEO, Mike Zafirovski, in the statement.

As of its last quarterly filing, the company had $2.4 billion in cash and $4.5 billion in debt.  On Wednesday, Nortel said its cash position remains at $2.4 billion, but it did not disclose its debt load or total assets.   However, its Chapter 11 bankruptcy filing, made today in Delaware, shows that the Bank of New York Mellon Corp. is a trustee on $3.8 billion of debt.  The company's other creditors include the contract manufacturer Flextronics International Ltd.

During the technology boom, Nortel employed more than 95,000 and was worth nearly $300 billion at its peak in 2000, accounting for one-third of the market value on the entire Toronto Stock Exchange.

But those days are a distant memory to the $155 market value the company had when trading closed Tuesday.  Its work force now stands at just 26,000 people.

Shares of the company's stock were down 66 percent when it resumed trading on the Toronto Stock Exchange Wednesday.

For years Nortel has been trying to recover from an accounting crisis that produced regulatory investigations, shareholder lawsuits and the dismissal of key executives, including CEO Frank Dunn. 

Mohammed Nakhooda, a Nortel spokesman, declined to disclose which assets the company would not try to sell, and it is unclear what effect the bankruptcy filing might have on the company's sponsorships of the 2010 Olympic Winter Games in Vancouver and the 2012 Games in London in 2012.

Tony Clement, Canada's Minister of Industry, said the government is prepared to assist Nortel in restructuring to become a viable company.  Indeed, the government has already agreed to provide up to $24 million in short-term financing and is open to discussing additional loans, Clement said.

"The government of Canada appreciates the importance of the telecommunications industry to our economy," he said in a statement.

In December, Nortel admitted that it was considering a bankruptcy filing, news that has divided opinion among analysts.

"They would gain very little out of the bankruptcy filing and lose a lot," CreditSights analyst Ping Zhao told the Associated Press.

Considering the long-term service contracts required for telecommunications network equipment, "you have to really convince your customers that you're going to be around," he said.

However, without creditor protection Nortel had limited options.

The recession has slowed global spending on information-technology, while frozen credit markets made it more challenging to sell off business units to generate cash.  Indeed, the company has been searching since September, without success, for a buyer for its Metro Ethernet unit.

Meanwhile, some customers have been delaying orders as doubts about the company's viability have surfaced, said UBS analyst Nikos Theodosopoulos.

"Nortel has enough cash to run its business this year and probably a good part of next year as well," he told the AP.

However, the bankruptcy protection would provide Nortel with a "better chance to preserve itself."


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