News

15 January 2009

 

Nortel files for bankruptcy protection during restructuring

Telecom equipment maker Nortel Networks Corp of Toronto, Canada says that it, Nortel Networks Ltd (NNL) and certain other Canadian subsidiaries have obtained an order from the Ontario Superior Court of Justice creditor protection under the Companies’ Creditors Arrangement Act (CCAA) in Canada. Ernst & Young Inc is serving as the court-appointed monitor under the CCAA process and will assist in formulating a restructuring plan.

In addition, certain of US subsidiaries, including Nortel Networks Inc and Nortel Networks Capital Corp, have filed voluntary petitions with the US Bankruptcy Court for the District of Delaware under Chapter 11 of the US Bankruptcy Code. Nortel Networks Inc has also brought an application and obtained an order in the Canadian Court recognizing the Chapter 11 cases in the US as ‘foreign proceedings’ in Canada and giving effect to the automatic stay under the US Bankruptcy Code in Canada.

Also, Nortel Networks UK Ltd (NNUK) and certain subsidiaries of the Nortel group incorporated in the Europe, Middle East and Africa (EMEA) region have each obtained an administration order from the English High Court of Justice under the Insolvency Act 1986. The applications were made by the EMEA subsidiaries under the provisions of the European Union’s Council Regulation (EC) No 1346/2000 on Insolvency Proceedings and on the basis that each EMEA subsidiary’s center of main interests is in England. Representatives of Ernst & Young LLP have been appointed as administrators of each of the EMEA companies and will continue to manage them and operate their businesses under the jurisdiction of the English Court and in accordance with the applicable provisions of the Insolvency Act.

However, the firm says that its normal day-to-day operations should continue without interruption, and it remains focused on serving its customers through continued R&D investments and support of its product portfolio.

Nortel made this decision with the unanimous authorization of its board of directors after thorough consultation with its advisors and consideration of all other alternatives. The process should allow the firm to deal with its cost and debt burden, to restructure its operations, and to narrow its strategic focus in an effective and timely manner. 

Nortel began a process to turn its business around and transform itself in late 2005, and claims that it has made progress on a number of fronts. However, the firm says that the global financial crisis and recession have compounded its financial challenges and directly impacted its ability to complete this transformation. It adds that, with a $2.4bn cash position at the end of 2008, it is taking the action now to preserve its liquidity and fund operations during the restructuring.  

“Nortel must be put on a sound financial footing once and for all,” says president & CEO Mike Zafirovski. “These actions are imperative so that Nortel can build on its core strengths and become the highly focused and financially sound leader in the communications industry that its people, technology and customer relationships show it ought to be.” The actions will be the fastest, most effective means to translate improved operational efficiency, double-digit productivity, focused R&D and technology leadership into long-term success, he adds.

Nortel’s affiliates in Asia, including LG Nortel and in the Caribbean and Latin America, as well as the Nortel Government Solutions business, are not included in the above proceedings and are expected to continue to operate in their ordinary course of business.

In addition, the firm is requesting that the courts impose restrictions on trading in its common shares and Nortel Networks Ltd’s preferred shares in order to preserve valuable tax assets in the USA. Trading restrictions, if imposed, would apply immediately to investors beneficially owning at least 4.75% of (i) the outstanding common shares of Nortel Networks Corp or (ii) any series of preferred shares of Nortel Networks Ltd. For these purposes, beneficial ownership of stock will be measured in accordance with special US tax rules that, among other things, apply constructive ownership concepts and take into account indirect holdings.  There will be no immediate trading restrictions imposed on debt securities of the firm or its affiliates, although the courts may, at the firm’s request, impose certain trading restrictions at a later date.

NNL has entered into an agreement with Export Development Canada (EDC) to permit continued access to its EDC performance-related support facility for an interim period of 30 days for up to a maximum of US$30m of support, based on Nortel’s currently estimated requirements over the period. The agreement is conditioned upon receipt of certain court approvals in the CCAA proceeding granting security to EDC over the assets of the Canadian filing entities. Over the next 30 days, EDC and Nortel will work together to see if a longer-term arrangement, acceptable to both parties, can be reached.

NNL has also entered into an amendment to arrangements with its key supplier that Flextronics will continue to maintain the supply chain after the start of the above proceedings. NNL has agreed to purchase US$120m of existing inventory by 1 July and to make quarterly purchases of other inventory and to terms relating to payment and pricing. The amendment is subject to Canadian court approval in connection with the CCAA proceedings. The arrangements will terminate in July as a result of the exercise by Flextronics of its termination rights under such agreement, while the other arrangements between the parties will continue in accordance with their terms, as amended.

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