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Nortel opts for bankruptcy; can it survive?

Posted: 16 Jan 2009     Print Version  Bookmark and Share

Keywords:bankruptcy  reorganisation  telecommunications  manufacturing services 

Nortel Networks Corp.'s Chapter 11 bankruptcy filing is said to give the troubled company breathing room to allow it successfully complete a reorganisation it started in 2005.

The gambit, while offering temporary relief from creditors, could eventually help sink the company, ending one of the more compelling sagas in the North America telecommunications equipment market.

The Canadian company's bankruptcy filling on Wednesday in Canada and in a Delaware court was already a source of speculation among industry watchers, although many doubted Nortel would take the radical step. One reason was that the company still has more than Rs.10,007 crore ($2 billion) in cash, enough to continue funding operations through a recession-wracked 2009.

In November, credit rating companies, responding to concerns that Nortel's bonds were trading significantly below value, downgraded the company. But the agencies still believed Nortel could dodge the bankruptcy bullet since its available cash and short-term securities were at least triple its annual cash utilisation " about Rs.2,602 crore ($520 million), according to a Standard & Poor's estimate.

Nortel executives apparently concluded otherwise, opting instead for a bankruptcy reorganisation that leaves its business intact while getting rid of problematic debt covenants.

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

By filing for bankruptcy, Nortel will not have to immediately pay about Rs.535 crore ($107 million) in bond interest due this week, and it could gain additional leverage in negotiating future debt repayment with creditors. That action solves one problem, debt obligations, but immediately creates many more problems for Nortel.

The immediate problem is convincing customers, component suppliers and contract manufacturers that it can continue to function as a going concern and meet its obligations. The company noted in its statement that it already reached an agreement with electronics manufacturing services provider Flextronics International Ltd., which would guarantee continued manufacturing services to Nortel throughout its bankruptcy.

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