Nortel Networks Corp. bonds are back from the dead.
The iconic Canadian telecom-equipment maker is still languishing in bankruptcy protection, with most of its flagship assets auctioned off, but bonds issued by the company have been soaring in an arc Nortel investors haven't seen since the heady days of the Internet boom.
An investor who bought Nortel's 10.125-per-cent bonds at their low point of 10 cents on the dollar back in March, about six weeks after the company filed for protection, has made more than seven times the original cost.
The bonds rose to about 76 cents on the dollar Wednesday as the company continues to sell assets, helping it pile up about $3-billion (U.S.) in cash so far to pay back creditors that include the bondholders.
“It's a pretty amazing round trip,” said Barry Allan, founder of Marret Asset Management, a debt-investing firm that owns Nortel bonds and has ridden them all the way down from a purchase price of about 80 cents and back up again.
Such a big turnabout is rare, but not unprecedented. In the case of Stelco Inc., the steel maker's bonds slumped in bankruptcy down to similar levels, yet holders eventually got all their money back as the company's fortunes improved while it was under creditor protection.
Nortel's rising bonds also raise hopes that other creditors, including pensioners who face losing a big chunk of their retirement savings, may have a better shot at getting back some of the money they are owed.
There's no light at the end of the tunnel, however, for Nortel's shareholders.
The stock was delisted from the Toronto Stock Exchange last summer and there is little chance that anything will be left for shareholders of what was once by far the most valuable company in Canada, with a market capitalization of $350-billion (Canadian).
Nortel's creditors have benefited from an overall rally in the bond market, but more important, the company has been selling assets for bigger prices than many investors expected, thanks to an improved economy and financial markets. Just before Christmas, Nortel announced another sale, this time of its carrier voice-over-Internet-protocol business for $282-million (U.S.)
Bondholders also got a big win in late December when Nortel settled a $3-billion tax lawsuit levelled by the U.S. Internal Revenue Service for just $37-million, again leaving more cash for creditors. Before that, the bonds were trading at about 60 cents.
“The settlement with the IRS and carrier VoIP sale are clear positives for higher Nortel recoveries, at both the bond and pension levels,” said Geof Marshall, a portfolio manager who specializes in high-yield bonds for the Signature Global Advisors division of CI Investments.
The jump in price suggests investors who owned the bonds before they began their big descent when the company slid into bankruptcy may recover most of their money.
The bonds haven't been paying interest, and investors are owed the face value of the bonds plus the missed interest payments. In some cases, that adds up to 105 cents on the dollar.
A year ago, some analysts predicted that Nortel bondholders would lose most of their investment, recovering only about 20 cents on the dollar after the bankruptcy process was concluded. Now, it appears that investors in the bonds will get at least 75 cents on the dollar back in cash, along with potentially an equity stake in whatever remains of Nortel after the bankruptcy process concludes.
However, Mr. Marshall said there aren't likely many more gains ahead for anybody who buys the bonds at these levels.
“Recoveries will be higher than bond current levels, but the bulk of the trade is behind us.”
