Giant Toronto-based telecommunications equipment maker Nortel Networks filed for Chapter 11 bankruptcy protection in the U.S. and its equivalent authority in Canada.
The company said the process would allow it to deal decisively with its cost and debt burden, to effectively restructure its operations and to narrow its strategic focus in an effective and timely manner.
The filing came one day before it was due to make an interest payment of about $107 million, Reuters pointed out in a report.
Interestingly, Nortel said in its announcement it currently has $2.4 billion in cash. But the company stressed that it needed to confront problems of high costs and increasing debt if it is to restructure its operations effectively, and to narrow its strategic focus.
Launching a turnaround program in late 2005 put it in a position in which the global financial crisis and recession “compounded Nortel’s financial challenges and directly impacted its ability to complete this transformation,” the company said.
“Nortel must be put on a sound financial footing once and for all,” according to president and 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. I am confident that the actions we’re announcing today will be the fastest, most effective means to translate our improved operational efficiency, double-digit productivity, focused R&D and technology leadership into long-term success.”
Nortel said that its normal day-to-day operations will continue without interruption.
Meanwhile, the rush of U.S. retailers toward bankruptcy protection continued, with regional department-store chain Gottschalks Inc. saying that it planned to file, and apparel chain Goody’s LLC announcing that it would liquidate its remaining 282 stores and return to Chapter 11. Goody’s, which operates in 20 states, recently emerged from a prepackaged Chapter 11 filing. Gottschalks has 58 department stores and three specialty apparel stores in the western U.S., according to Reuters.
Nortel said that it is asking the courts to impose certain restrictions on trading in its common and preferred shares in order to preserve valuable tax assets in the U.S. Trading restrictions would apply immediately to investors beneficially owning at least 4.75 percent of the outstanding common shares of Nortel Networks Corp. or any series of preferred shares of Nortel Networks Ltd. The company did not elaborate on the exact nature of those tax assets.
It also said that there will be no immediate trading restrictions imposed on debt securities.
“It’s obviously a remarkable transformation from where it was as the largest company in Canada worth about 35 percent of the TSX in 2000,” Gavin Graham, director of investments at BMO Asset Management, told Reuters. “But this is a reflection of the way that the telecommunications industry has changed.” Nortel has been hurt by intense global competition from giants such as Alcatel-Lucent, as well as low-cost Asian vendors such as Huawei Technologies at the same time that telecom companies have pared overall spending on the equipment that Nortel makes.
Nortel has also been plagued by accounting problems. In the middle part of this decade, it restated its financials at least four times in a four-year period, most recently in 2007.
Reuters said that Nortel’s major creditors include Bank of New York Mellon, with claims valued at nearly $4 billion, citing court filing in U.S. bankruptcy court for the district of Delaware.