Nortel files for Chapter 11

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By CAROLINE GABRIEL

Published: 15 January, 2009

READ MORE: Nortel Networks

Nortel Networks has filed for bankruptcy protection, the day before it was due to make an interest payment of US$107m on outstanding loans. Shares in the Canadian firm fell by 76% to just 75 cents, despite its brave protestations that this signalled an opportunity, while the company still has substantial cash reserves, to put a wholesale restructuring in place that would finally enable the telco equipment maker to put years of accounting scandals and sales declines behind it.

Nortel filed for protection from its creditors under Canada's CCAA (Companies' Creditors Arrangement Act); and some US subsidiaries in a Delaware court under the US Chapter 11 code. Some EMEA units are expected to make similar filings. The vendor blamed the global financial crisis, but the company has endured a long series of setbacks even before the downturn started, and analysts were speculating before the holiday period that it would be forced to file for bankruptcy protection.

In 2005, the company put in place a major reorganization in the wake of its accounting scandals, and current CEO Mike Zafirovski has battled bravely to build on that, but has been forced to more and more extreme measures to try to turn the ship. Most recently, last fall, he put the metro Ethernet unit up for sale, having already exited W-CDMA, and the whole future of the wireless business was called into question when the once high profile WiMAX development was offloaded into a partnership with Alvarion.

"The global financial crisis and recession have compounded Nortel's financial challenges and directly impacted its ability to complete [its] transformation," Nortel said in its statement.

"Nortel is taking this action now, with a $2.4bn cash position, to preserve its liquidity and fund operations during the restructuring process."

"Nortel must be put on a sound financial footing once and for all," said Zafirovski in the statemement. "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 company's affiliates in Asia, including LG Nortel, and in the CALA region, as well as the Nortel Government Solutions business, are not included in the proceedings.

As usual under these circumstances, Nortel will continue daily operations, helped by a new deal with its contract manufacturer, Flextronics, to maintain its supply chain, provided Nortel buys $120m of existing inventory by July 1 and then buys up excess inventory quarterly. The vendor, once Canada's highest valued company, insisted that it will continue to support all its products and invest in R&D in strategic areas (which could include LTE).