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You are here: Home / Enterprise I.T. / Nortel Networks Files Bankruptcy
Nortel Networks Files for Bankruptcy Protection
Nortel Networks Files for Bankruptcy Protection
By Patricia Resende / CRM Daily Like this on Facebook Tweet this Link thison Linkedin Link this on Google Plus
Is Nortel Networks another victim of the economy or of bad management and fraud? The Canada-based provider of telecommunications equipment filed for bankruptcy protection as part of a plan to turn the company around, it announced Wednesday. The application will be reviewed by the Ontario Superior Court of Justice.

Nortel is also asking the court to approve a deal with one of its key suppliers, Flextronics. Under that deal, Nortel Networks Limited will purchase $120 million of existing inventory by July 1 and make quarterly purchases of other inventory.

Two of the company's U.S. subsidiaries, Nortel Networks and Nortel Capital, have also filed for Chapter 11 bankruptcy protection. The company's EMEA subsidiaries will also be filing for protection in Europe.

The move to protect assets came after the company's board said it had exhausted other efforts. Nortel, however, may also be trying to protect itself from $107 million it owes in interest payments.

No Surprise

Nortel's filing shouldn't be a surprise. In the last several years the company has had more than a dozen rounds of layoffs. Just last year Nortel paid $35 million in a civil suit filed by U.S. regulators after the Securities and Exchange Commission said the company was involved in two fraudulent account schemes to meet expectations on Wall Street. Former Nortel CEO Frank Dunn was charged with criminal fraud for also allegedly tweaking the company's financials in 2002 and 2003.

Current ?CEO and President Mike Zafirovski began an effort to turn the company around in late 2005, but the global financial crisis and recession compounded the company's bottom line, according to Nortel. In November, Nortel reported $3.4 billion in third-quarter losses.

"Nortel must be put on a sound financial footing once and for all," said 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."

Zafirovski went on to say he's confident that the moves are the company's fastest and most effective way to succeed. The plan, he said, is to improve efficiency, have double-digit productivity, and focus on research and development.

Securing Ground

Nortel plans to hold on to a $1.94 billion (CDN$2.4 billion) cash reserve to get it through the restructuring process.

In addition to the filings, Nortel is also asking the court to impose restrictions on trading of the company's common shares and Nortel Networks Limited's preferred shares to protect tax assets in the United States. If the court agrees, the restriction would be applied to investors who own 4.75 percent of the company's outstanding common shares.

One Canadian agency, Export Development Canada, has offered to supply the company with a $24.2 million (CDN$30 million) commercial loan. The terms haven't been determined, according to Philip Taylor, an EDC spokesperson.

"We had to issue a 30-day waiver on the unsecured portion; the $30 million is a capital infusion," Taylor said. "Terms of how that will be repaid depend on how they will use it. As they emerge from restructuring, they will need capital and the EDC is open to being at the table."

This isn't the first time EDC, which provides loans to Canadian companies that export goods or services, has worked with Nortel. Currently, it has $145.3 million (CDN$180.6 million) in unsecured loans to Nortel customers.

EDC provides a bond to customers and upon completion of a contract the money is returned in either 30, 60 or 90 days, depending on the terms of the bond.

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